Mutual 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.

Avneet Kaur
Updated9 Jul 2020, 12:16 PM IST
As of March 2018, the Indian mutual funds industry had total AUM worth ₹21.36 trillion, of which 3.8% were managed passively, said the report.
As of March 2018, the Indian mutual funds industry had total AUM worth ₹21.36 trillion, of which 3.8% were managed passively, said the report.

Mutual 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.

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First Published:9 Jul 2020, 12:16 PM IST
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