A question arises in every investor’s mind, how Mutual Fund Expenses are recovered? Do they recover it from you before they declare the NAVs of the respective schemes? Are the returns you receive from Mutual Funds Investments is the net expenses incurred by them while managing the funds?

What is Mutual Fund Expense Ratio?

The Mutual Fund expenses include fund management fee, agent commissions, registrar fees, and selling & promoting expenses. Now the question arises, how much the fees are charged? which involves the concept of Mutual Fund Expense Ratio.

Mutual Fund Expense Ratio is a measure of the cost involved to operate the mutual fund by the company. The expense ratio is determined through annual calculation, where a fund’s operating expenses are divided by the average value of its Assets Under Management. This ratio is calculated periodically but is charged is charged daily on Net Value Assets.  It is expressed as a percentage of the fund’s average weekly net assets disclosed every  March and September.

How Mutual Fund Ratio impacts your Returns?

Mutual Fund Ratio helps you to know how much the fund is paid every year to manage your investments. In case you have invested Rs 1,00,000 in a Mutual Fund, whose mutual fund expense ratio is 1.8%, you are paying Rs 1,800 every year to manage your investment. That is, if Mutual Fund is earning, say, 15%, your return would be 13.2%. The Net Asset Value’s are declared net of expenses. Therefore, it is important for you to know what is the expense ratio of a mutual fund. A higher Mutual Fund Expense Ratio signifies lower returns and a lower Mutual Fund Expense Ratio signifies higher returns.

Securities Exchange Board of India’s Regulation on Mutual Fund Expense Ratio

Different mutual fund scheme has a different expense ratio, so SEBI has put a cap on the charges by the mutual fund which are –

Net assets Equity schemes Debt schemes
First Rs. 100 crore 2.50% 2.25%
Next Rs. 300 crore 2.25% 2.00%
Next Rs. 300 crore 2.00% 1.75%
On the balance of assets 1.75% 1.75% 1.50%

Recently, the SEBI has provided an option for the investors who wanna invest in Mutfual funds directly which means not through the distributors. If the investments are bought directly, the Net Asset Value is called as the Direct plan Net Asset Value. It will not bear the distributor fee.  That means the direct plan Net Asset Value will be higher than the regular Net Asset Value to that extent. This way, you may increase your returns on your Mutual Fund investment.

Should Mutual Fund Ratio matter to you?

In competitive countries, it really matters because the returns an investor gets is mostly single digit but a country like India, the average return an investor mostly gets is double-digit, so mutual fund expense ratio has not really mattered much, especially in equity funds.

For instance, the average return of equity funds over the last 10 years was 23 percent annually. This return, which is post expenses, is good enough. You may select a fund which is reasonably performing and may ignore the mutual fund expense ratio. But in the case of Debt Mutual Fund, this ratio really matters. Mutual Fund expense ratio plays a crucial role while selecting Debt fund to invest.

Where to find the Mutual Fund Expense Ratio?

You should go through the offer document section called ‘Fees and expenses of the scheme’, whenever you think of investing in a new fund scheme. It will give you the maximum expense ratio that a mutual fund can incur. For an existing scheme, the monthly fact sheet or the Key information Memorandum will help you to know about the recurring scheme expense.

Mutual Fund Expense Ratio and its tenure of the Investment

When you are investing for a shorter period for like 6 months or 1-2 years, the mutual fund expense ratio will not matter you much and you can probably avoid it. But if you are investing for a longer period of 5-10 years then you have to know about the history of the mutual fund expense ratio and follow its likely projections and performance. you also have to keep in mind that a lower mutual fund expense ratio does not always lead to a better-managed fund. The fact is a good fund is always the one that delivers good return with minimal expenses.