The expense ratio is the annual maintenance charge levied by mutual funds to finance its expenses.
It includes annual operating costs, including management fees, allocation charges, advertising costs, etc. of the fund.
An expense ratio is determined by dividing a fund's operating expenses by the average dollar value of its assets under management (AUM).
Operating expenses reduce the fund's assets, thereby reducing the return to investors.
Suppose the expense ratio is 1 percent and your investment is Rs 10,000, then Rs 100 is what you pay to the company as an operating fee.