Investing in Mutual Funds, SIPs? Know how expense ratio impacts your money - EXPLAINED

Mutual Funds: The expense ratio is the total amount of annual expenses incurred by the fund. It includes the management fee and operating expenses.

Mutual Funds: Expense ratio is an annual fee charged to all shareholders of a particular mutual fund. It's expressed as a percentage of assets. Photo: Pixabay

Mutual Fund investment is fast gaining popularity among the salaried class, especially among those who have just begun their professional career. Since mutual fun allows to invest in monthly mode through SIP (systematic investment plan) too, it becomes easier for the earning individual to invest in mutual funds. However, one should know that there is an expense ratio involved while investing in mutual fund schemes. In layman's language, the expense ratio is a cut that every investor has to pay through the mutual fund houses annually.

Speaking on the expense ratio involved in mutual fund investment Amit Kukreja, a SEBI registered tax and investment expert said, "An expense ratio is an annual fee charged to all shareholders of a particular mutual fund. It's expressed as a percentage of assets. For example, if a fund has an expense ratio of 1.1 percent, then Rs 11 of every Rs 1,000 is taken out every year by the mutual fund company to pay for various operating expenses. The expense ratio is the total amount of annual expenses incurred by the fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing and distribution fee." He said that these expenses are divided by the assets under management. Simply put, the expense ratio is the per-unit cost incurred in managing the fund. The net asset value (NAV) which you see daily is calculated after deducting these expenses. However, the expense ratio of a fund is disclosed only once every six months.

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Speaking on the expense ration Kartik Jhaveri, Manager — Wealth Management at Transcend Consultants said, "An expense ratio is an annual charge that an investor has to give. At the time of investment, the expense ratio can be either taken separately or can be adjusted from the amount invested. Generally, the expense ratio ranges from 0.75 per cent to 2.5 per cent of the net investment. However, in the case of insurance mutual funds, the expense ratio rises by around 0.75 per cent." Jhaveri went on to add that the expense ratio of equity and debt funds differs. Since the expenses of equity funds are more than those of debt funds, the expense ratio on equity funds is greater. As per the regulations of the Securities and Exchange Board of India (SEBI), a mutual fund can charge a maximum expense of 2.5 per cent (equity funds), 2.25 per cent (debt funds), 1.5 per cent (index funds) and 0.75 per cent (Fund of Funds).

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