There are multiple investment options available in the market today,and all of them have an associated cost. Mutual fund schemes too are types of investmentthat come with a said cost, and the costs associated with running a mutual fund scheme are clubbed as ‘expense ratio’. Although you might not be able to view these expenses in your statement, you should know how they work and their impact on your returns.
Before you choose a mutual fund investment, let’s understand total expense ratio in detail:
Broadly, the cost of investing in a mutual fund scheme is termed as the expense ratio. It involves annual operating costs along with management fees, allocation charges, and advertising costs. However, it does not include any sale or redemption charges at the time of purchase.
Ideally, the expense ratio is based on the size of the mutual fundin question. For instance, if your fund operates on a smaller pool of financial resources, it will allocate a specific portion towards optimal management. Hence, there is an increase in the relative value of the expenses associated with the available number of funds.
The total expense ratio depends on the size of your respective mutual fund.
Let’s understand how the total expense ratio is paid:
Mutual fund houses don’t present an itemized list of expenses to you, but instead, charge an amount that is equal to the total expense ratio from your investment. It is deducted from the income that is generated from your fund assets. This reduces the overall yield available to you as an investor.
As an investor, it is essential to know how to calculate your share of the total expense ratio. Although your expenses are not mentioned in your statement, you can still calculate it all by yourself easily.
Let’s look at the steps below:
Step 1: Take the total expense ratio
Step 2: Multiply it by the average amount you have invested in mutual funds over the past year
This calculationwill help you find the fees that have been indirectly paid by you.
Let’s simplify the calculation further with the help of an illustration. Let’s assume that you have invested Rs. 50,000 in a fund with a 2% expense ratio. In this scenario, you will end up paying Rs.1,000 to the fund house to manage your money. If your fund earns 10% returns and has a total expense ratio of 2%, you can roughly estimate your effective returns to be about 8%.
NOTE: Mutual funds’ total expense ratios may vary from 0.1-3.5% for many tax-saving funds in India.
In a nutshell, an expense ratio is the annual operating fee that applies to you when you invest in mutual funds. Even if you invest in mutual funds online, you will be charged an expense ratio by the fund house for the management of the fund(s). So seek professional help in case you are still unclear about the charges. Happy investing!