Mutual fund expense ratio

MUTUAL FUND EXPENSE RATIO – DEFINITION AND DETAILS?

Mutual fund expense ratio is an annual fund operating expenses. This is the percentage of payable assets to the fund manager. With the help of team analysts and other analysts, the asset manager manages, divide and advertise the fund to manage risks and maximize returns.

What Is The Definition Of Mutual Fund Expense Ratio?

It calculates per unit cost of managing a fund. So it can be calculated by the ratio between the fund’s total expenses and its assets under management. Asset management companies hire qualified professionals to check developments in debt, money markets and equity. Therefore, they also transact accordingly in the asset markets.

Must Read: MUTUAL FUND DEFINITION- WHAT IS MUTUAL FUND?

What Are The Components Of Expense Ratio?

For running the mutual fund scheme expense Ratio includes many charges in a smooth way. They recover this expense from the mutual fund investors on a day-to-day basis. Hence in every six months, they disclose it to the investors.

There are 3 main kinds of expenses as a part of the Expense Ratio:

  1. Management fees

Mutual funds need formulation of investment plans before actually investing money in the underlying assets. Further,  Fund managers require possessing a high level of educational, relevant fund management professional credentials and experience. Investment advisory fee or management fee is compensation for these managers’ expertise. This annual fee is about 0.50% – 1.0% of the funds on average assets.

  1. Administrative costs

These are the expenses of running the fund. Hence,  this would include customer support, record keeping, communications and information emails. They can be different and can be shown as a percentage of fund assets.

  1. 12-1b Distribution Fees

Many mutual funds collect the 12-1b distribution fee for promotional and advertising purposes. Usually, they promote the fund to the investors and charge their shareholders to market.

Mutual Fund Expense Ratio Implications

Mutual fund expense ratio indicates the percentage of sales to the total of a group of expenses or individual expense. So a higher ratio means less profitability. Also, a lower ratio means more profitability. So, you may use the expense ratio to differentiate between passively managed and actively managed funds.

Comparative Analysis Of Expense Ratios

In the selection of mutual funds expense ratio can be an important criterion because it impacts the overall returns a unitholder can earn.

Must Read: BEST MUTUAL FUNDS SIP A GOOD OPTION TO INVEST IN 2019

Here are the analysis and comparison of the funds

Name Of Mutual FundType Of Mutual FundExpense Ratio
Axis Long Term EquityELSS1.97%
Edelweiss Tax AdvantageELSS2.68%
SBI Small And Mid CapSmall and Midcap2.28%
Reliance Small CapSmall cap2%
HDFC Growth DirectLarge-cap1.61%

Hence we can clearly see that expense ratio is important but it is not only criteria when you are selecting a mutual fund scheme.

Therefore high mutual fund expense ratio impacts the fund returns. If the funds are managed in a truculent manner then the high returns can be an outcome of high expense ratio. It is due to the choice of good stocks and investments in the asset.

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