Understanding Importance Of Expense Ratio In Mutual Funds

If you thought mutual funds manage your money for free, you are making a mistake. Everybody charges for services rendered and this is also true in the mutual fund industry.

What is an expense ratio for mutual fund industry?

There are various charges that mutual funds incur and these they pass on to investors. For example, fee to manage the fund, commissions that they pay to agents, registrar fees, and selling and promoting expenses.

If you are buying an existing scheme, you can easily see the expense ratio. For example, Quantum Mutual Fund has very good track record of low expenses. The Long Term Equity Fund - Direct Plan has an expense ratio of just 1.25 per cent. What this means that every Rs 100 invested under the plan would cost the investor only Rs 1.25.

This is very much low and acceptable, unlike most funds, where it can very easily go to in excess of Rs 2.

Of course, expense ratio is not the only thing that an investor should look at, but also entry and exit load, past track record of the mutual fund etc. In any case we hope you found the information useful and you can read many such articles in our classroom section.

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