What is expense ratio in Mutual Funds? | Complete guide (2024)

So you got to know what is expense ratio. Now let's see what are the basics and what affects it:

The ratio is calculated by taking into account the following expenses done by the AMC:

• Management fees- Mutual Fund is an actively managed fund. It means AMC has to employ fund manager and a group of the team which will continuously study the market and makes the investment. This ensures that your investment will gain maximum returns. It also helps the AMC to maintain its position and good performance among the competition.

• Advertising and Promotion expense- It's charged by AMC to promote the concept of mutual funds among the people and to promote themselves.

• 12B-1 fee- It's the annual marketing or distribution fee on a mutual fund. It is between 0.25%-0.75%.

• Legal & Audit expense.

• Registrar and transfer agent expense- It is charged when you purchase a fund.

• Custodian fee- It is charged by the AMC for safe-keeping services. It is service offered by financial institutions to safeguard the assets of the clients, which reduces the risk of the client's assets security.

AMC deducts their expense ratio while calculating NAV (Net Asset Value). What is nav in mutual fund? How to calculate?. NAV is the per unit price of an AMC's particular fund. It means when the value of NAV of a certain fund is calculated, it is inclusive of the expense ratio of the particular fund company.

Value of NAV is published everyday whenever the market is open for trade. These are because at the end of the trading day whatever loss or profit is made on the investment, on that basis per unit price is calculated again and the expense is also deducted from the investment for that particular day.

If you had bought a particular fund at Rs. 20 per unit price (NAV) and its current value is Rs. 30, so you got a return of 50%. This return is calculated after deducting expense ratio.

There are certain fees charged by AMC which are also included in the NAV like brokerage charges and other charges which are also deducted from NAV, but these fees are not included.

In the long term investment expense ratio matters a lot because of the compounding, it can affect your investment a lot. The ratio is not constant in the mutual fund. It keeps on changing depending on the AMC.

As a SEBI guideline, it's necessary for a fund company to announce any change in its ratio to the investors.

Every fund has a different ratio. To check a particular funds ratio, you can compare it with the average ratio of that fund in the market. Lets consider an XYZlarge-cap fundis charging an expense ratio more than the average ratio of large-cap mutual fund schemes in the market and the fund is giving very good returns and risk factor is less than the competitors, than the high ratio is ok but if the performance of the fund is very poor then you should be careful while investing in that fund.

It's not necessary that a fund with a low ratio is a good fund. You should consider the performance of the fund, fund manager expertise, risk factor of the fund

No AMC can charge more than 2.5% for equity and 2.25% for debt mutual fund.

The direct fund has a lower ratio since no intermediary is involved while in regular fund expense ratio is more as a part of its spend on the distributor for that advice.

Equity (ELSS)-

Large-cap fund-

Mid Cap fund-

Small Cap fund-

By the SEBI Regulation Act 1996, Mutual Funds are allowed to charge operating fees for managing the mutual fund scheme.All expenses incurred by a Mutual Fund AMC will have to be managed within the limits specified under Regulation 52 of SEBI Mutual Fund Regulations.

For actively managed equity schemes, the total ratio (TER) allowed under the regulations is 2.5 % for the first ₹100 crore of average weekly net assets; 2.25 % for the next ₹300 crore, 2 % for the subsequent ₹300 crore and 1.75 % for the balance AUM. For debt schemes, the ratio permitted is 0.25 % lower than that allowed for equity funds.

Expense Ratio is deducted from the NAV every day. Let's take an example if the ratio of the mutual fund is 1% and you invested Rs. 1,00,000. The ratio is charged 1% annually that means one-day the ratio charged is 1%/365.

So next day if your investment becomes 1,00,200 then your ratio deducted for that day will be 1%/365 x 1,00,200 = Rs 2.74. If the investment becomes Rs. 1,01,000. then the ratio deducted will be 1% /365 x 1,01,000 = Rs 2.76. In this way, everyday expense ratio will be deducted from your investment.

Fidelity has announced zero expense ratio mutual funds for investors. It will be known as Zero Index Fidelity Funds.