the cheaper expense ratio that costs a SIP investor more

A friend sent me a screenshot on Saturday. Two ways to own the same Nifty 50 sitting side by side, one an index fund, one an ETF. He had circled the ETF's expense ratio, 0.10 percent against the fund's 0.35, and asked the reasonable question. Why would anyone pay more for the same fifty stocks.

Because the expense ratio is the only cost most people compare. And it is the one cost the ETF wins.

He runs a ten thousand rupee SIP. That buys twelve times a year. Every one of those ETF buys pays a bid-ask spread, the small gap between what sellers want and buyers offer, plus whatever the trade moves the price. On top of that the demat account that holds an ETF charges a flat fee every year just for existing. None of it appears on the fee line he was reading.

So I added it up for one year on his Rs 120000. The index fund cost him about Rs 230, the fee and nothing else, because it transacts straight at NAV with no demat and no spread. The ETF cost about Rs 605. Sixty-five rupees of fee, around two hundred forty in spread spread across the twelve buys, three hundred of demat charge. The vehicle with the lower sticker price ran a bill almost three times larger.

Here is the part that keeps it honest, because the ETF is not the villain. Put a lump sum in once and hold it for a decade and the ETF wins, the spread is paid a single time and that lower fee quietly compounds in its favour. The vehicle is not better or worse. It fits a different way of buying.

The expense ratio is the price on the shelf. The spread is the price at the till. For a monthly SIP you walk to the till twelve times a year, so add up both before you call one cheaper: