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What is the impact of expense ratio while choosing a fund?

Portfolio and drivers for performance should be taken into consideration when it comes to choosing a fund, expenses could be a filter thereafter, suggests Dhirendra Kumar

How does the "expense ratio" of a particular MF have an impact on my decision to choose a direct mutual fund through an SIP?
- Joydeep Ghosh

A fund with a higher expense ratio will give you lower returns, with everything else being the same. For example, two different funds are generating a return of 20 per cent. Now, following the deduction of the expense ratio, the fund which has higher expenses will give you a lower return. However, the NAV and returns you will get to see are after they are adjusted for expenses. So, I would say that ideally, the fund with a lower expense should give a higher expense-adjusted return.

But a lower expense can also be because of the size of the fund, as the SEBI-mandated formula actually governs the expense ratio that a fund company can charge based on its size. As the fund gets bigger, it has to charge lower expenses. But when a fund gets bigger, its ability to beat the market could also reduce, as it loses on its manoeuvrability and flexibility. So, there needs to be a compromise while selecting a fund.

If you have chosen three-four funds which you like and within that, if you have to filter one or two of them in which you will invest, the fund portfolio, as well as its sustained performance, should be the primary driver for you to choose the fund and expense could be an added one.

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