The definition of an expense ratio is termed as the annual fee that an investor that is charged for the fund management. To get through in detail, take a read.
Expense Ratio – All About with respect to Mutual Funds
Expense ratio, also, known as Annual Fund Operating Expenses is the percentage of assets that is payable to the fund manager.
The fund manager with the help of a team of experts and analysts, manage, allocate & advertise the fund to manage risks and maximize returns. But, if the fund’s asset is minimal, the expense ratio can be high, reason being, the fund has to meet its expenses from a smaller or restricted asset base. Uniformly, if the net-assets of the fund are significant, then the percentage of an expense ratio should come down ideally.
Expense Ratio – The Components
The components of expense ratio can be figured out as below:
- Management Fees: Mutual Funds require the overall formulation of investment strategies just before investing your money in the underlying assets. Investment advisory or the management fee is compensation for the fund managers. It is about 0.50-1% of the fund’s assets.
- Administrative Costs: These are known as the expenses that run the fund; including customer support, service, keeping records, communications, and information emails.
- 12-1b Distribution Fees: Inhere, distribution fees are for promotional and advertising purposes. They are charged to promote the fund to the investor(s).
Expense Ratio – Impacting Fund Returns Accordingly
Expense ratio indicate the total fund charges in terms of annual percentage just to manage your investment portfolio. For instance, if you invest INR 20,000 in a fund having an expense ratio of 2%, it means you need to pay INR 400 to the fund house for managing your money.
Expense Ratio – Implications
As per the courtesy from www.cleartax.in ; here you can find-out the implications:
Expense ratio indicates the percentage of sales to the total of individual expense or a group of costs. A lower rate means more profitability and a higher rate means lesser profitability. It becomes critical for schemes with comparatively more moderate yields.
Apart from that, you may use expense ratio to differentiate between actively managed and passively managed funds. In case of actively managed equity funds, the alpha generated by the fund manager is a compelling justification for the fee they charge. If you find a wide divergence between the returns of your fund and index funds, then you may think of making a switch.
On That Note
However, the expense ratio is important; the criteria whilst selecting a mutual fund scheme is important too. For this, you can take a read here: https://www.gulaq.com/tips-for-investing-in-mutual-funds/
Not to miss, the higher expense ratio can over-shadow the decent returns. Also, if tracking markets is not your thing & you are finding it tedious to understand, then invest through www.gulaq.com. You can invest in paperless and hassle-free manner. Get in touch with the experts to know more or you can email: [email protected]
Till then,
Keep Investing!
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing