How do I explain the deductions happening because of expense ratio each year when investing for the long term in index fund or top rated mutual of that category?

The expense ratio goes to paying the fund manager costs, marketing, overheads and the distributor if there is one. If you keep it low, your compounding goes up and you make much more money. Here are some tips to keep it low:

1. Go for a direct plan instead of regular plan. These cost less; naturally you can do it only with help of an RIA and not a distributor.
2. Go for index funds instead of actively managed or ‘top rated’ mutual fund. Most of the latter have under perfumed the index itself.
3. Track the cost of non performance and weed out funds which are not doing well. It is worthwhile paying an advisor a small fee to maximise your overall returns.

If you are seeking higher returns, consider investing in direct equity with the help of a trusted investment advisor[1]. The cost might be comparable to other options, but the returns could be much higher.

Disclaimer:

I am a SEBI Registered Investment Advisor, however the answers here should not be considered as investment advice. Please contact me via the information shown in the profile for any investment advice related to direct equities or other investments.

Footnotes[1] http://jamawealth.com