Last Updated:
This ratio is calculated by dividing a mutual fund’s operating expenses by the average total dollar value of all assets in the fund.
It is the fee an investment company charges.(Representative Image)
If you’re planning to start a SIP or invest a lump sum in mutual funds, you’ve probably come across the term “Expense Ratio.” But what does it mean?
In simple terms, the Expense Ratio is the annual fee you pay to the fund house for managing your investment. It covers the fund’s operational and management costs.
This fee is calculated by dividing the fund’s total annual operating expenses by its average assets under management (AUM).
You don’t need to pay this fee separately—it’s automatically deducted from your investment value daily. For instance, if you invest Rs 5,000 in a fund with a 2% annual expense ratio, about 0.0054 per cent is deducted each day. While it may seem like a small amount, it can affect your overall returns in the long run.
Understanding how the expense ratio works—and how it can impact your investment—can help you make more informed and profitable decisions.
What is a good expense ratio for Mutual Funds?
A good expense ratio for a mutual fund is determined by the investor’s objectives, risk tolerance, and other factors. In general, a low expense ratio is beneficial to a mutual fund as it indicates that more of the investor’s money is invested rather than utilised to cover operating expenses.
Several factors influence whether an expense ratio is considered high or low. An optimal expense ratio for actively managed portfolios is between 0.5 per cent and 0.75 per cent. Anything beyond 1.5 per cent is generally considered high.
The Mutual Fund Expense Ratio includes several types of charges:
Management Fee:
This fee is charged to compensate the people for operating a mutual fund. Portfolio and fund managers spend significant time and effort identifying successful investment opportunities through comprehensive market research and calculated predictions.
Maintenance Expenses:
It covers the everyday operational costs of running a mutual fund. It includes administrative costs, record-keeping, regulatory compliance and various overhead expenses.
12B-1 Fee:
It is a type of expense that a fund may charge over distribution and marketing costs, or in simple language, the amount spent on the promotion of the relevant mutual fund.
Entry Load:
It is the amount that an investor must pay when they join a mutual fund.
Exit Load:
Similarly, exit load is the amount payable when a person chooses to withdraw from a mutual fund.
Brokerage Fee:
Brokerage fees are the costs spent when a mutual fund buys or sells assets in its portfolio. These costs fluctuate depending on the fund’s trading activity and are often included in the overall expense ratio.
Expense Ratio Formula:
Expense Ratio = Total costs / Average Assets under Management (AUM)
Here, the total cost is the expenses carried by the AMC, such as fund management fees, marketing and distribution charges, and legal/audit costs. Average AUM is the total value of all investors’ money in the fund.
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al…Read More
A team of writers and reporters decodes vast terms of personal finance and making money matters simpler for you. From latest initial public offerings (IPOs) in the market to best investment options, we cover al… Read More
- Location :
Delhi, India, India
- First Published:
