Cost drag — the 30-year view
In this chapter: 1% TER vs 2% TER over 30 years · Compounded cost of churn and capital-gains taxes
Costs compound — a 1% annual fee over 30 years can shave 25-30% off the final corpus. The components: explicit (TER, exit load, stamp duty), implicit (transaction costs from fund manager turnover), tax (capital gains realised within fund passed to investor; or short-term churn forcing investor STCG).
Worked example: ₹10,000 monthly SIP for 30 years at 12% pre-cost return. With 1% TER, final value ≈ ₹3.5 crore. With 2% TER, final value ≈ ₹2.5 crore. Difference: ₹1 crore over a lifetime — for a 1% per year fee differential. Fund manager turnover (e.g., 100% per year, common in some active funds) creates implicit transaction costs of 30-50 bps per year. Capital gains harvested within the fund pass through to investor on redemption — a high-turnover fund can produce ₹50,000+ in unintended STCG/LTCG taxes over 10 years.
A subtle exam-relevant nuance: index funds beat the average active fund largely because of cost — not because of stock-picking failure. The SPIVA India scorecards show that over 10 years, ~80% of large-cap active funds underperform the benchmark, mostly due to cost drag. A 1.5% TER active fund needs to outperform by 1.5%+ pre-cost just to match a 0% TER index fund. This is hard sustainably. The honest case for active is in mid/small-cap (where index efficiency is lower) or focused mandates.