How do mutual funds charge expense ratio?

In case of a lump sum investment in any mutual fund, would I be charged for expenses only once or every year? - Neeraj Sharma

The expense ratio is a fee that mutual funds charge investors for operating costs, like management and other administrative services.

How is the expense ratio charged?
Mutual funds charge the expense ratio by deducting it daily from the fund's net asset value (NAV). For example, if the annual expense ratio is 1.5 per cent, the NAV gets reduced by about 0.0041 per cent daily (1.5 per cent/365 days). So, the daily fee works out as Rs 0.0004 on an NAV of Rs 10.

Let's expand on this with an example. You make a lump sum investment of Rs 120,000 in a fund with an NAV of Rs 10. You receive 12,000 units.

So, your daily expense is = Rs 0.0004 x the number of units (12,000), i.e., Rs 4.8.

This expense changes daily based on the NAV of that particular day. So, adding up the daily fees over a year will give you the total yearly expenses charged on your investment.

Note that in the case of SIPs, your invested amount grows with each instalment, increasing the number of units and, consequently, your expenses.

Also read: Do revised exit loads apply to old mutual funds?

This article was originally published on October 09, 2024.