The calculation
Enter a monthly instalment, an expected annual return and a period. The calculator compounds the series and splits the outcome into contributions and return.
For an actively managed scheme, the rate you enter is a guess about a manager. For an index fund it is a guess about the index, minus the cost of tracking it — and that cost is both small and entirely knowable in advance, which makes it worth examining.
The expense ratio compounds like everything else
A fund's expense ratio is deducted from NAV every day. It does not appear as a line on your statement; it is simply absorbed into the price. Because it is charged on the balance rather than on the contribution, it grows as the portfolio grows.
Run the comparison in the calculator. ₹10,000 a month for twenty-five years:
- At 12%, you end somewhere near ₹1.9 crore
- At 11%, materially less — the difference runs well into tens of lakhs
That one percentage point is roughly the gap between a regular plan of an active fund and a direct plan of an index fund tracking the same market. It is not a small optimisation; over a long SIP it is often larger than the difference between a good active fund and an average one.
Index funds and ETFs exist mainly to make that number as small as possible. They do not try to beat the index, so they do not need to pay for research and stock selection.
Index fund or ETF for a SIP?
Both track an index. They differ in how you buy them.
- An index fund is a mutual fund. You place a SIP, units are allotted at the day's NAV, and you never see a market price. This is the simpler vehicle for a monthly SIP.
- An ETF trades on the exchange like a share. You need a demat account, you buy at the market price, and that price can sit slightly above or below the underlying value. Running a disciplined monthly SIP in an ETF is more work and introduces a spread on every purchase.
For most people running a monthly instalment, the index fund is the practical choice. ETFs make more sense for larger, less frequent purchases.
Tracking error
An index fund will not match its index exactly. The gap — tracking error — comes from costs, cash held for redemptions, and the timing of changes to the index. A well-run large index fund keeps it small.
When comparing two funds on the same index, the expense ratio and the tracking error are essentially the whole comparison. There is no manager skill to assess, which is the point.
How to use this calculator
- Enter the monthly investment.
- Set an expected return rate. For an index fund, start from a long-run expectation for the index and subtract the expense ratio.
- Set the time period.
- Run it again a point lower to see what the cost difference is worth over your horizon.
What is excluded
The result is before tax. Equity gains above ₹1.25 lakh in a financial year are taxable, and each SIP instalment carries its own holding period. Index funds typically have no exit load after a short initial period, but confirm for the specific scheme.