The function of a mutual fund is to collect money from different investors, research on quality securities like equity shares; bonds etc. and employ investors’ money in them to give good returns over time. To do this function every mutual fund levies a charge on mutual fund schemes, which is ultimately borne by the investor, known in industry jargon as Expense Ratio. Not many investors seem to be aware of the existence of such a charge as it does not appear on account statements or transaction statements but is mentioned in the offer documents and the website of the Fund. Nevertheless the fact remains - there are no free lunches!
What is expense ratio?Mutual funds
are not like banks, which earn their profits and deduct expenses from interest spread - which is the difference in interest they earn on loans and what they pay on your deposit. Mutual funds deduct their expenses from the assets of the fund.
Daily NAV (Net Asset Value) of funds is calculated after deducting expenses. Thus, expense ratio is accounted for in the NAV of a fund. This is why often it does not come to our notice. Know more on the logic behind the NAV’s.
The expense ratio deduction happens daily. However, depending on the type of the scheme and AUM, the expense ratio varies. Generally, the expense ratio of an equity scheme is greater than a debt scheme.
Is the tiny expense ratio worth your attention?
Since expense ratio is a charge deducted from assets, it is implied that higher the expense ratio, lower your returns. Also longer your investment period, higher is the impact of expense ratio on your returns. This fact is demonstrated in the illustration below. Table used above is for illustrative purpose only.
In the above example, the difference between the expense ratios of the three funds is probably because of the higher commissions, management fees, marketing budget etc paid by the Fund B and Fund C. It is like losing Rs 1.68 lakhs over 20 years, i.e. about Rs 8,000 annually.
Expense ratio of direct plan funds are lower compared to regular plans since the former is bought directly from the AMC.
Difference in return gets magnified with a higher investment period so it would be prudent to pay attention to what your fund’s expense ratio is, especially as a long term investor. It is unwise to ignore the Expense ratio before investing in mutual funds as it would certainly be useful in choosing between funds of the same category when the performance of both funds is on par.
Know your mutual fund’s expense ratio
As with other relevant data, current expense ratio would be disclosed on the website of the mutual fund.
If you are unable to locate expense ratio on the website of the fund, you can find it on various mutual fund research sites Or you can simply ask the fund house’s investor service desk.
Remember – the lower the expense ratio the better for the long term investor.
Therefore, while investing in a mutual fund is definitely not a humongous task, it is important to take note of small things like the expense ratio before you park your hard earned money with them. Remember, you should consult your financial advisor in case if you need any guidance regarding your financial investments.
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Mutual fund investments are subject to market risks read all scheme related documents carefully.
Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.