Mutual funds come associated with multiple costs, or say fees to manage the funds you’ve invested. These costs include fund maintenance, management, custodian, transfer and registrar agent fees, commissions payable, marketing expenses, and other related costs. These different charges are listed under one common tab known as the mutual fund expense ratio. This is a percentage value every mutual fund investor needs to pay on a yearly basis. In this blog post, we will discuss seven important things about the mutual fund expense ratio you should know before buying your selected MF scheme.
7 important things about mutual fund expense ratio
1.Components of mutual fund expense ratio
As discussed above, the mutual fund expense ratio combines several costs and maintenance charges as mentioned below :
- Fund management fee – These charges include the fee of fund managers, portfolio managers and advisors.
- Maintenance and service cost – Include services like documentation and account statements, etc.
- Brokerage costs – costs associated with trades in the investment portfolios
- Custodial expenses
- Registrar and Transfer expenses
- Marketing expenses
- Other Business expenses (branches, infrastructure, rent, etc)
Learn more about mutual fund expense ratio components here:
2.Expense ratio is dynamic
TER is a number that is expressed as a percentage of daily assets of a mutual fund scheme. It is there on the official website of the mutual fund you’re investing in, and also in the terms and conditions sheet. Generally, the fund houses make changes in the expense ratio on an annual basis. Further, many times, fund houses attract investors by offering low expense ratios and hike the rate when the investors buy their scheme.
Note that when the expense ratio is increased, it needs to be informed to investors at least three days before making the change, via a notification.
3.Active vs Passive and Direct vs Regular
Regular plans of most mutual fund schemes are sold individually by the distributors and the TER associated with these schemes factors in the commissions payable along with other included costs. Note that the TER of a direct mutual fund plan doesn’t include the commission payable and hence come with a lower expense ratio as compared to the regular plans. If you’re a DIY investor, and are capable of making your investment decisions, then you can freely invest in direct plans.
Moreover, the active mutual funds tend to charge more than the passive ones. So, keep it in mind before investing in a passive plan.
4.Expense ratio and investment decisions
While the mutual fund expense ratio is an important factor to consider while selecting a mutual fund scheme, it shouldn’t be the only criteria for the selection. At the time of accessing passive funds, the expense ratio plays an important role. Further, in debt funds, make sure to check the ability of your fund manager to manage both interest rate and credit risks, along with other factors.
5.Expense ratio and fund returns
The higher the expenses ratio, the lower will be the profitability and vice-versa. So, try to look for the funds that come with a lower expense ratio. Also, make sure to keep an eye on the expense as most fund houses hike it annually.
6.Direct funds have a lower expense ratio, but quality is more important
There is no doubt that the direct plans come with a minimum expense ratio. And if you’ve good knowledge of mutual fund investment and you’re capable of making your investment decisions on your own, then direct plans are the best options for you. However, the quality and performance of the fund is the most important factor that needs to be concerned.
7.Expense ratio is not always a fixed percentage
The expense ratio is not a fixed entity. They keep changing periodically. So, just because the expense ratio was low when you signed up for a scheme, doesn’t mean it will be the same over time. But the good thing is, investors are informed about any such changes in advances.
This was everything about the mutual fund expense ratio you need to know about. We hope this guide clears all your doubts regarding the expense ratio.