Sales commissions and loads are not included. The expense ratio formula is calculated by dividing the fund’s operating expenses by the average value of the fund’s assets.Īs you can see, only the operating expenses are used in the expense ratio equation.
Let’s take a look how to calculate the management expense ratio. Potential and current investors use this ratio to see how efficiently the fund is being managed. As the fund grows in size, it will require more labor to maintain, but the fees will also be spread out amongst the new investors. Needless to say, it’s a labor-intensive activity to operate a mutual fund.Īll of these costs are shared amongst the investors.
Tax professionals must also be hired to file the tax returns for the fund and issue reports for each of the investors. The fund must also maintain an office with a staff to mail monthly, quarterly, and annual statements to investors.
A professional money manager must actively monitor the invested assets, research new investments, and make sure the fund is investing according to its goals. Mutual funds can be costly to create, manage, and maintain. In other words, measures the percentage of your investment in the fund that goes to paying management fees by comparing the mutual fund management fees with your total assets in the fund. A fund that delivers good returns with minimal expenses is the way to go.Definition: The expense ratio is an efficiency ratio that calculates management expenses as a percentage of total funds invested in a mutual fund. But bear in mind that a lower expense ratio does not necessarily make the fund better. Thus, before venturing into any fund, you should check its expense ratio. Though the difference between the expense ratio of direct and regular plans might not look substantial in percentage terms, the impact on the overall corpus becomes meaningful over a period of time. This is due to the additional cost of paying commissions to the distributors in the former case. Regular plans have a higher expense ratio as compared to direct plans. So, it's better for investors to choose a fund that has a low expense ratio.įurther, if you are capable of managing your own investments, you may significantly lower your expense ratio and receive higher returns over time by staying away from regular plans. But if we include the cost of, let's say 1.5 per cent, expense ratio, your returns would reduce to Rs 3.5 lakh, nearly 13 per cent less than what it would have been without any expenses. For example, the value of Rs 1 lakh after 10 years with 15 per cent rate of return will be about Rs 4 lakh. Or you can easily access the same on the respective fund's page on the Value Research website by using the search bar at the top.Ī high expense ratio over the long-term may significantly eat into your returns.
To find out the expense ratio of a fund, you can check its disclosures on the website of the given asset management company (AMC). How to find out the expense ratio of a fund? This fee is charged irrespective of the fund's performance, be it positive or negative. Different funds have different expense ratios but SEBI has stipulated an upper limit of 2.25 per cent and 2 per cent on these ratios for equity and debt funds respectively. Fund's daily NAVs (net asset values) are reported net of such fees and expenses. Now, as an investor, your returns at the end of the year would be 13 per cent, i.e.,15 per cent returns generated by the fund reduced by 2 per cent of the expense ratio. After a year, the fund earns 15 per cent returns from its portfolio. Let's say, you invested in a fund today with an expense ratio of 2 per cent. However, you don't have to pay it separately as it gets adjusted from the returns generated by the mutual fund itself. Thus, as an investor, you pay a fee in proportion to your investment value in the fund.
The expense ratio is expressed as an annualised percentage of the fund's assets under management (AUM). These include fund management fees, agent commissions, selling and promotional expenses and other charges incurred by the fund. The expense ratio is a single basket that includes all the charges that investors need to pay mutual funds companies to manage their money. This fee is called the 'expense ratio' of the fund. As it goes for any service that you take, for instance, a lawyer for your legal matters, a chartered accountant for filing your income tax returns, or an architect for your house, mutual fund managers charge a fee for building and managing your investment portfolio.