- Mutual fund expense ratio explained in 5 points
- Every MF ned to incur expenses to manage the money of an investor
- Things to know about Mutual Fund expense ratio
Mutual Funds needs to incur expenses at some level in order to manage the money of the investors. SEBI or Securities and Exchange Board of India allows them to charge certain operating expenses to manage the Mutual Fund scheme which is called the expense ratio.
The Expense Ration of a Mutual Fund scheme includes expenses like sales and marketing, advertising expenses, inventment management fees, administrative expenses, registrar fees, transaction costs, audit fees and custodian fees.
Having said that, all the expenses incurred by a Mutual Fund should be managed within the limits which are specified under Regulation 52 of SEBI Mutual Fund Regulations.
Let us now take a look at the five things you must know about the expense ration of a Mutual Fund
1. The Expense Ratio is calculated as a percentage (%) of the Mutual Fund scheme’s average Net Asset Value (NAV). The daily NAV of a Mutual Fund is disclosed only after deducting the expenses. Thus, the TER (Total Expense Ratio) has a direct bearing on a MF scheme’s NAV.
2. Equity Mutual Funds can charge a maximum expense ratio of 2.25% and debt funds can charge up to 2%.
3. In the case of close-ended and interval schemes, equity-oriented schemes can charge a maximum of 1.25% and all schemes other than equity oriented schemes can charge maximum of 1%.
4. Index funds, Exchange Traded Funds (ETFs) and Fund Of Funds (FOFs) can charge up to 1%. The total expense ratio forFoFs shall be a maximum of twice the total expense ratio of the underlying funds.
5. Mutual Fund schemes can charge additional 30 basis points (1 basis point = 1/100th of a per cent ) if they are bringing inflows from retail investors in the B-30 cities.
6. All the Mutual Fund companies disclose the total expense ratio on their website on a daily basis under a separate head. You can find the expense ratio of a scheme on the AMFI website https://www.amfiindia.com/ as well. AMFI stands for Association of Mutual Funds in India is the mutual fund regulatory body.
Though Expense ratio is important, but it should not be the only factor considered while selecting or choosing a Mutual Fund scheme. A scheme with a consistently decent track record, but a higher expense ratio may be better than the one which has a lower expense ratio, giving poor returns.