What does a 1.5% TER gap between index and active compound to over 25 years?
Scenario
₹15,000 monthly SIP, 25-year horizon, 12% gross fund return. Compare direct-plan Nifty 500 index fund (0.25% TER) vs typical direct-plan active large-cap fund (1.20% TER), assuming the active fund matches the index gross before TER.
Inputs
- Horizon years
- 25
- Index ter %
- 0.25
- Active ter %
- 1.2
- Monthly sip INR
- 15000
- Gross return %
- 12
Calculation
- 1.
Index fund net CAGR
12% − 0.25% → 11.75% CAGR
- 2.
Index fund 25-year corpus
₹15K × SIP-FV factor at 11.75%, 25 yrs → ₹2.77 Cr
- 3.
Active fund net CAGR (matching index before TER)
12% − 1.20% → 10.8% CAGR
- 4.
Active fund 25-year corpus
₹15K × SIP-FV factor at 10.80%, 25 yrs → ₹2.40 Cr
- 5.
TER drag cost
₹2.77 Cr − ₹2.40 Cr → ₹37.00 L
Conclusion
~₹37 lakh of avoidable loss over 25 years from choosing an active large-cap fund that merely MATCHES the index before TER. The active manager needs to outperform the index by 0.95% per year just to draw level after costs.
Tradeoffs
In reality, 87% of active large-cap funds underperform the index BEFORE costs — they don't just match it. The expected-value math is far worse: a typical large-cap active fund delivers 11-11.5% net (vs 11.75% index), making the gap ~₹15-20 lakh PLUS the TER drag.