Expense Ratio: Things You Cannot Afford To Miss About This Integral Aspect Of Mutual Funds

Every mutual fund entails an annual maintenance charge to cover the cost of maintaining and managing the fund and this cost is an integral part of all mutual fund schemes irrespective of whether they fall in the debt fund category or equity mutual funds.

Expense Ratio: Things You Should Know About Integral Aspect Of Mutual Funds

Expense ratio i.e. charged to investors is generally computed as a percentage of total assets under management of the fund.

Notably the various constituents of expense ratio are management fee, administrative costs, distribution fees etc.

Computation of expense ratio:

Expense ratio: Total Expenses- Total fund assets

Illustration to understand the computation of expense ratio; In a case the fund's corpus is equivalent to Rs. 5 lakh and incurs Rs. 10000 as fees and other charges.

So expense ratio here will be 10000/500000*100=2%

Typically when the asset base or assets under management of the fund are lower the fund charges a higher expense ratio as the fund management has to be met out of that small base of asset fund only.

Understanding the impact of expense ratio on mutual funds return

NAV or net asset value of the mutual fund is computed after deducting the expense and charges pertaining to mutual funds during a year.

Say in a case if the returns from the fund are 9% and then it charges an expense ratio of 1.5% then the overall return shall be 7.5%. So, for enhancing your mutual fund returns you definitely need to opt for low cost mutual funds meaning funds that charge a lesser expense ratio.

4. SEBI guidelines for TER

As per the Regulation 52 of the SEBI Mutual Fund Regulations:

Assets under management (AUM) slab	Expense ratio ceilings for equity-focused schemes (%)	Expense ratio ceilings for non-equity focused schemes (%)
For the first Rs.500 crore	2.25	2.00
For the next Rs.250 crore	2.00	1.75
For the next Rs.1,250 crore	1.75	1.50
For the next Rs.3,000 crore	1.60	1.35
For the next Rs.5,000 crore	1.50	1.25
For the next Rs.40,000 crore	TER reduction of 0.05% for every Rs.5,000 crore increase in AUM or part thereof.	TER reduction of 0.05% for every Rs.5,000 crore increase in AUM or part thereof.
For daily net assets above Rs.50,000 crore	1.50	0.80

TER Limit stipulated for passively managed and close-ended schemes

Scheme type	TER ceiling
Equity-focused close-ended or interval schemes	1.25
Funds beside equity-focused close-ended or interval schemes	1.00
Exchange-traded funds (ETFs) or index funds	1.00
FoFs that invest in actively managed equity-focused schemes	2.25
FoFs with investments in actively managed non-equity-focused schemes	2.00
FoFs that allocate their assets to liquid funds, index funds, and ETFs	1.00

Direct funds charge a lower expense ratio:

These funds that do not have bear commission and other charges, charge a lower percentage as expense ratio. Thus Direct plans carry a higher Net asset value and a lower expense ratio.

Factors that govern or influence expense ratio

Other than the assets under management which to an extent determine the Expense ratio, say in case of active management of funds higher skill set and risk management techniques are employed and hence the fund entails a higher cost.

Conclusion

So, while at the initial look, the difference in expense ratio of the 2 fund may look to be insignificant over the term of investment it can mean a significant cost outgo, impacting your returns and hence your broader financial goal.

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