Lower expense ratio offers a greater chance to earn high returns
17-Sep-2013 •Research Desk
Please explain the effect of Expense Ratio on a fund's NAV. Is it a percentage? When is it applied?
-Behram Wadia
All asset management companies charge a fee for managing investors' money. It is charged as a percentage of assets under management. The fee includes expenses incurred on management, operations and marketing. Apart from these, SEBI has allowed AMCs to charge an expense of 20 basis points in lieu of exit load and 30 basis points for raising money beyond top 15 cities. Also, they are allowed to charge service tax on the advisory fee. These expenses combined together make the total expense ratio of a fund.
A fund' s NAV factors-in these expenses. The AMC deducts expenses from the NAV on a daily basis. For instance, if the NAV of fund is Rs 10 and expense ratio is 1.5 per cent and the gain of the fund is also 1.5 per cent then the NAV will remain at Rs 10. If the gains were 2.5 per cent, the NAV would have increased by one per cent at Rs 11. If the return of the fund was zero, the NAV would be Rs 8.5. Higher the expense ratio lower will be the gains and vice versa. So, it is important to check the expense ratio before investing in a fund.
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