How mutual fund returns are worked out
A fund’s returns are reduced by its expense ratio, the yearly fee it charges. The return you actually earn is roughly the gross return minus the expense ratio. When you sell, equity gains over ₹1.25 lakh in a year are taxed at 12.5% if you held the units for more than a year.
Net return = gross return − expense ratio
SIP value = SIP × ((1 + i)n − 1) ÷ i × (1 + i), with i the monthly net return. Lumpsum = P × (1 + net return)years.
Worked example
Direct or regular plans?
- Direct plans have lower expense ratios because there is no distributor commission.
- Regular plans pay a commission, so the ratio is usually 0.5% to 1% higher.
- Over 20 years, even a 1% difference can reduce your final value by a noticeable amount. Try changing the expense ratio above to see.
Frequently asked questions
What is an expense ratio?
It is the yearly fee a mutual fund charges, as a percentage of your investment. It is already deducted from the fund’s NAV.
How is equity mutual fund tax calculated?
Gains on units held for over a year are taxed at 12.5% on the amount above ₹1.25 lakh a year. Units sold within a year are taxed at 20%. Rules can change, so check the current law.
Does this work for debt funds?
No. Debt fund taxation is different. This calculator assumes an equity fund.
Can returns be guaranteed?
No. Mutual funds carry market risk. Use a conservative return assumption for planning.