In order to manage a mutual fund scheme , there are various expenses or costs that an Asset Management Company AMC or a fund house incurs. These expenses are charged to the investor in the form of a fee called the expense ratio.
The majority of these expenses are Investment and Advisory fees. Different mutual fund schemes have different expense ratios. There are different regulations related to expense ratio for equity-oriented and non-equity oriented schemes.
The following table shows the regulation set by SEBI for AMCs to adhere to while charging expense ratio for open-ended equity-oriented and open-ended non-equity oriented schemes:. In addition to this, for all passively managed funds and other closed-ended schemes the maximum permissible limit for TER are as follows:.
As you can see from the above tables, you can clearly see that all expense ratios are expressed in percentages. But the percentage of what? For instance, if a fund manages total assets or AUM worth Rs. Then, the total expenses incurred by the fund will Rs. Now an expense ratio of 1. So the expense ratio is already accounted for in the daily NAV of the fund. How does this happen? So in order to arrive at the NAV, expenses are deducted from the end of day value of the portfolio.
For instance, if the expense ratio is 1. So keeping a check on the expense ratio tells you how much real return have you earned on your investment. So ideally, due to compounding, by the end of 10 years, your investment value should have been Rs.
But, it will only be Rs. This helps you maximize your returns. Sometimes, it can be higher or lower too. Now, if you choose a debt fund that has a higher expense ratio, say 1.
So in order to protect your returns, you need to be extra cautious about expense ratio while choosing a debt fund as they have relatively lower yield than equity funds. Choosing a debt fund with the least expense ratio will help you maximize your returns. Expense Ratio can be treated as one of the parameters to compare two or multiple funds. For instance, if two funds have performed similarly in the past, it gets difficult for an investor to choose which fund should they go with.
On top of this, the Securities and Exchange Board of India allows all the mutual funds to charge 30 basis points more as an incentive to penetrate in smaller towns B15 Cities. These cities also enjoy an additional 20 basis points as exit load charges.
For example, if you invest Rs. Mutual fund expense ratios range from 0. Example : 1. If the fund handles Rs. Though the expense ratio is important, it is not the only criteria while selecting a mutual fund scheme. A scheme with a consistently decent track record may tell you differently about the TER. Sometimes, the higher expense ratio can overshadow the decent returns. You can invest in hand-picked funds by our in-house experts in a hassle-free and paperless manner. Start investing now or.
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Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A mutual fund's expense ratio is very important to investors because fund operating and management fees can have a large impact on net profitability. The expense ratio for a fund is calculated by dividing the total dollar value of fund assets by the total amount of fund fees—both management fees and operating expenses—charged to investors in the fund.
Expense ratios for mutual funds vary widely. Expense ratios for index funds are significantly lower than for actively managed portfolio funds, averaging 0. Expense ratios for actively managed funds averaged 0. Most investors do not realize the significant impact of a seemingly small percentage difference in mutual fund expense ratios, but an example easily demonstrates that even a relatively small difference has a significant effect on net investment profits. The single percentage point difference may not seem significant to most investors, but it is because the fee amount is based on assets under management, not the profit earned.
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