What is the expense ratio in a mutual fund scheme?
The expense ratio is a kind of ratio. It refers to the expenditure incurred on the management of mutual funds per unit. To calculate the expense ratio of a mutual fund scheme, its AUM (Asset Under Management) is divided by the total expenditure. Actually, the fund house has a team of trained professionals. This team keeps an eye on the market and companies. The same decision is taken to buy or exit a stock. Along with this, the Asset Management Company (MMC) also incurs expenses related to transfer and registrar, custodian, legal and audit expenses, marketing and distribution of the scheme. All these expenses are taken from the customer who bought the units of the mutual fund. The net asset value of a mutual fund scheme is the value derived after deducting such expenses.
Why is the expense ratio of regular plan more than that of direct plan?
Direct plans are offered by fund houses directly. That is, these plans can be purchased directly from the mutual fund company. At the same time, regular plans can be purchased through intermediary or distributors such as independent financial advisors, banks or NBFCs. Mutual fund companies pay commissions to intermediaries. It is charged as the express ratio of the plan. This is the reason that the expense ratio of the regular plan is high.
What is the limit for the expense ratio of a mutual fund?
The market regulator SEBI has fixed the expense ratio. Based on the AUM of the open ended equity scheme, SEBI has made various slabs. The scheme, whose AUM is Rs 500 crore, can charge a maximum of 2.25 per cent as the expense ratio. The expense ratio for the scheme with an AUM of Rs 500-750 crore is 2 per cent. The expense ratio can be 1.75 per cent for schemes with Rs 750–2,000 crore, 1.6 per cent for schemes with 2,000–5,000 crore AUM and 1.5 per cent for funds with Rs 5000–10,000 crore AUM. According to the SEBI directive, the expense ratio for the 10,000–50,000 crore AUM scheme will decrease by 0.05 percent after every Rs. 5000 crore increase. If the AUM of a mutual fund scheme is more than 50,000 crores, then AMC can charge 1.05 per cent as the expense ratio.
Do mutual fund expression ratios affect returns?
The expense ratio indicates how much the fund is charging you for managing your investment portfolio. If you invest Rs 10,000 in a scheme with 2% express ratio, then it means that you will have to pay a fee of Rs 200 to manage this amount. In this way, if the fund’s return is 12 percent and its express ratio is 2 percent, then you will earn 10 percent return. In this way a lower expense ratio means higher profits. At the same time, higher expense ratio means a profit phenomenon. However, it is true that higher expression ratios have an impact on the returns of the fund. However, it is not always necessary that a higher expense ratio means less profit. Investors should also take into consideration many other things in choosing a scheme.
