Ever Wondered What a Mutual Fund Expense Ratio Is? Read This!

As the famous quote goes, “There is no such thing as a free lunch”. If you want something desirable, you ought to pay for it. The same applies to mutual fund returns. Want to enjoy them? Then you got to pay a small fee.

Different types of investments come with different types of expenses. For mutual funds, it is the expense ratio. However, the mutual fund expense ratio is not necessarily a deal-breaker that should keep you away from adding mutual funds to your investment portfolio.

Yes, the NAV in mutual funds (Net Asset Value) is arrived at after deducting the expense ratio. But, in reality, the % can vary for different schemes and fund houses and you can still manage to earn inflation-beating returns.

Let’s get down to the basics, shall we?

What is the mutual fund expense ratio?

You pay an expense ratio to the mutual fund house to manage your investment. The fund house spends money on allocation, buying and selling, advertising and the like. The expense ratio is charged annually to cover these costs. It primarily depends on the size of the fund. A larger fund size can have a lower expense ratio, and a smaller one can have a higher expense ratio.

What are the components that add to the mutual fund expense ratio?

• Management fees

Mutual funds are managed by fund managers and just as you receive a salary for your services, the management fee is charged to cover the fund manager's services.

• Administrative or maintenance costs

This is charged to cover the expenses of maintaining a record of all investors, customer support, communications with investors through SMS, email newsletters, etc.

• 12b-1 distribution fees

Publicity, publicity, and publicity! This includes the money spent on promoting and marketing the mutual fund.

• Brokerage fees

This will be an additional cost contributing to your total expense ratio if you opt for regular plans. Direct plans do not involve brokers but regular plans do. The fund house hires a broker for buying and selling securities.

Does the expense ratio impact the mutual fund return rate?

The expense ratio is deducted from the profits generated by a mutual fund scheme. So, by the principle of simple math, a high expense ratio can lower your mutual fund return rate and vice versa. Therefore, you may pay attention to it while investment planning. Having said that, it is not the only indicator of a mutual fund’s expected rate of return.

Conclusion

Now that you know about the expense ratio, you can keep an eye on it when you choose a mutual fund.  And, if you want a better picture of your investment value in the future, you can use the mutual fund calculator to estimate the returns.

An investor education initiative by Edelweiss Mutual Fund

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