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Understanding Expense Ratio

Vigneshkumar asks us to explain the concept of Expense Ratio & wants to know if it affects a fund’s returns

Could you please explain the concept of 'Expense Ratio' in equity and debt schemes? Will it affect the schemes’ returns?

The expense ratio is the total amount of annual expenses incurred by the fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing and distribution fee. These expenses are divided by the assets under management. Simply put, the expense ratio is the per unit cost incurred in managing the fund. The net asset value (NAV) which you see daily is calculated after deducting these expenses. However, the expense ratio of a fund is disclosed only once every six months.

The expense ratios of equity and debt funds differ. Since the expenses of equity funds are more than those of debt-oriented funds, the expense ratio on equity funds is greater.

As per the regulations of the Securities and Exchange Board of India (SEBI), a mutual fund can charge a maximum expense of 2.5 per cent (equity funds), 2.25 per cent (debt funds), 1.5 per cent (index funds) and 0.75 per cent (Fund of Funds).

Costs do matter and one should take the expense ratio into account! So, while choosing a fund, everything else being equal, choose the fund with lower expense ratio, as it won’t eat up your investment and will result in a higher return.

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