BackMutual fund expense ratio explained in 5 points
All expenses incurred by a mutual fund have to be managed within the limits specified under Regulation 52 of SEBI Mutual Fund Regulations.
PremiumMutual funds have to incur some expenses to manage their investors’ money. Sebi allows them to charge certain operating expenses for managing a mutual fund scheme which is called expense ratio.
Expense ratio of a mutual fund scheme includes expenses such as sales & marketing or advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees and audit fees.
All expenses incurred by a mutual fund have to be managed within the limits specified under Regulation 52 of SEBI Mutual Fund Regulations.
Here are five things to know about expense ratio of a mutual fund:
1. Expense ratio is calculated as a percentage of the mutual fund scheme’s average Net Asset Value (NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses. Thus, the TER has a direct bearing on a scheme’s NAV.
2. Equity mutual funds can charge a maximum expense ratio of up to 2.25% and debt funds can charge up to 2%.
In case of close-ended and interval schemes, equity oriented schemes can charge maximum up to 1.25% and other than equity oriented schemes can charge maximum up to 1%.
Index funds, exchange traded funds (ETFs) and fund of funds (FOFs) can charge maximum up to 1%. The total expense ratio for fund of funds (FoFs) shall be a maximum of twice the total expense ratio of the underlying funds.
3. Mutual fund schemes can charge additional 30 basis points (1basis point = 1/100th of a per cent ) if they are bringing inflows from retail investors in B-30 cities.
4. Mutual fund companies disclose the total expense ratio on their website on a daily basis under a separate head. You can find the expense ratio of a scheme on Amfi website as well. Amfi is the mutual fund regulatory body.
5. Expense ratio is important, but it should not be the sole factor to select a mutual fund scheme. A scheme with a consistently decent track record, but a higher expense ratio may be better than the one which has a lower expense ratio, giving poor returns.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
