Hello Readers!
Mutual fund investment incurs various costs, like operational cost, management cost, and others. Before, mutual funds investment has cost like entry load and exit load. That is if you want to start investing in a mutual fund you will be charged an entry load and if you exit before time, then you have to pay an exit load.
Well, after the concept of Expense Ratio, introduced in mutual funds, the concept of entry load and exit load got over. In fact, nowadays, only exit load is charged to investors as a penalty for early withdrawal, that too is confined to a limited number of Equity mutual funds.
The costs under different heads are aggregated into a single figure and are charged to the scheme as a percentage of the assets managed. This is termed as the expense ratio (or total expense ratio – TER) of the scheme.
Let us know about prominent things related to Expense Ratio.
How Much Are MF’s Allowed To Charge?
Well, it is already mandated and fixed by the mutual fund regulator, SEBI about how much expense ratio can MF’s charge to their investors. It varies for different category funds.
While the equity funds can charge up to 2.25 percent, non-equity schemes can charge up to 2 percent as the base expense ratio. Exchange-traded funds investing in indices and gold cannot levy more than 1 percent as base TER. Fund of funds cannot charge more than 2.25 percent, including the expense ratio of the underlying equity schemes. Goods and services tax is charged over the base expense ratio.
Expense Ratio Is Dynamic!
TER is calculated as a percent of the daily assets of the scheme. It is made available on the website of the mutual fund and also in the fact sheet. It is changed periodically by the fund houses. Also, many fund houses, at the time of launch of the NFO, offer a low expense ratio to attract investors, and the same is gradually hiked within the limit prescribed by the SEBI after a track record is established.
Direct Plan Mutual Funds Charge Low TER!
The regular plan of mutual funds is sold by the registered distributors of mutual funds and the TER of these schemes factors in the commission payable along with other expenses. On the other hand, the direct plan of mutual funds does not include any kind of commission, and thus it charges a lower TER compared to a regular plan. If you are a ‘do it yourself investor’ and can choose the right schemes, then you can consider investing in direct plans.
Expense Ratio And Investment Decisions
The expense ratio of a mutual fund is a prominent criterion to be analyzed before you pick a plan to invest but one must remember, it cannot be the sole criterion for choosing an investment. what if in haste you pick up a fund that charges a low expense ratio, but don’t deliver the desired outcome, obviously there will be no benefit of your investment as you won’t be able to create the corpus required.
So basically, not only expense ratio investors need to consider other costs such as taxes and then pick up a fund to invest.
For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).