An investor will put Rs 25,000 a month into a Nifty 50 index fund and has three to choose from, each with a different expense ratio, tracking difference and fund size. Which does she pick?

Fund X, because its tracking difference, the cost she actually bears, is the lowest at 0.28%. Fund Z has the cheapest fee but lost 0.33% to the index, 0.23% more than its fee, a sign that its small size costs it in cash drag and trading. Over twenty years the gap between X and Z is about Rs 1.3 lakh on the same contributions.

Think of two taxis with the same meter rate. One takes the direct road; the other gets lost and runs up the fare. The rate card is the same; the bill is not. The expense ratio is the rate card, and the tracking differenceThe index return minus the fund return over a period. It is the total cost of owning the fund, fee included, measured against the index it copies. is the bill. An index fund also loses return by holding cash from new inflows before it is invested, paying brokerage when it buys, and receiving dividends later than the index assumes. Those leaks sit outside the fee but come out of the investor's pocket.

Fund Z manages Rs 90 crore. In a small fund, each day's inflows and outflows are a large share of the assets, so cash sits idle more often and trading costs are a bigger share of the fund. Fund Z's hidden cost, tracking difference minus fee, is 0.23%, against 0.08% for Fund X and 0.05% for Fund Y. A low fee also invites a question: new funds sometimes start cheap to gather assets, and the fee can rise later within the regulatory limits.

Over twenty years of monthly investing, yes. Assume the index returns 12% a year, purely for illustration. Rs 25,000 a month for twenty years grows to about Rs 2.22 crore in Fund X, Rs 2.21 crore in Fund Z and Rs 2.19 crore in Fund Y. The difference between X and Z is about Rs 1.3 lakh, and between X and Y about Rs 3.2 lakh, from contributions of Rs 60 lakh that are identical in every case.

One year is a small sample. Look at tracking difference over three and five years if the funds have it, and at how much it varies from year to year, called tracking error. A fund with a steady 0.28% is easier to rely on than one that swings between 0.1% and 0.6%. Check that the comparison uses the index's total return, with dividends, and the direct plan of each fund. If Fund Z grows and its tracking difference falls toward its fee, the answer could change in a year or two.