Dhirendra Kumar talks about the importance of the expense ratio while selecting a fund
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Does the expense ratio matter in equity funds? Should I consider it while choosing the fund?
Expenses always matter because the returns that you get is the net of expenses. For example, if a fund has two per cent expense and your return from the fund is 10 per cent, then the fund has actually earned 12 per cent, while you are getting 10 per cent.
There are two lines of expenses - one for regular plans and one for direct plans. The expense ratio of direct plans is always lower. It is the amount of distributors' commission that makes all the difference between a regular and a direct plan.
So, if a fund is paying very high commissions, then direct plans will be cheaper. On the other hand, if a fund is paying lower commissions, then the difference between regular and direct plans will be marginal. The difference ranges somewhere between half per cent to one per cent, as intermediaries get anywhere between half to one per cent.
But one shouldn't be completely guided by the expense of an equity fund. The regulator has mandated that as a fund gets larger, it is supposed to charge lower fees and becoming a large fund is also an impediment to its performance. And many times, big funds struggle to perform. So, don't be entirely guided by expenses, particularly in big small- and mid-cap funds. This is because being small is an advantage, as they tend to do better owing to greater flexibility and manoeuvrability with the fund manager.