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Expenses of a Mutual fund can severely impact returns


Funds can also charge for the service tax on their management fee. Hence, an equity fund with a corpus up to ₹100 crore may end up charging upto 3.3 per cent if you add different charges !!


What is it?

Mutual funds are professionally managed investment vehicles which help investors to grow their money by investing in financial assets such as equities, bonds, gold and other assets. Mutual fund companies charge a cost to their investors for managing their schemes. This cost is called the Total Expense Ratio.


What is it?

Mutual funds are professionally managed investment vehicles which help investors to grow their money by investing in financial assets such as equities, bonds, gold and other assets. Mutual fund companies charge a cost to their investors for managing their schemes. This cost is called the Total Expense Ratio.



Why is it important?

While mutual funds in the developed world charge a variety of fees and costs to investors, in India, almost all the costs are packed into the single metric of TER (the only cost outside of it is the exit load). The fund manager's fee and distributors' commission are two of the main components in the expense ratio. Though the investor does not pay an out-of-pocket commission to the distributor while investing in a mutual fund, the fund company pays it and charges it to investor as a part of the expense ratio.

SEBI has taken various measures to rationalise the expense ratio of mutual funds. In 2012, it made it mandatory for mutual funds to launch 'Direct' options in all their schemes. Direct plans are meant for investors who deal directly with the fund house and do not use the services of a distributor. As there are no commissions to be paid under this route, the expense ratios of Direct plans are notably lower than those of Regular plans.


Why should I care?

Your returns from a mutual fund depend on the growth in its Net Asset Value (NAV). This NAV is calculated after reducing the TER from the latest value of the scheme's portfolio. Hence higher the TER, the lower the money you take home as a fund investor.

While paying a 50 or 100 basis points more to a fund manager may not seem like a big deal when most equity funds are churning out double digit returns, even a small increase in TER has a disproportionate impact on what you finally get from your fund. Take the case of two identical index funds tracking the Nifty50, one with a 1 per cent TER and another with 0.5 per cent. Had you invested ₹1 lakh in each fund 15 years before, the first investment would now be worth ₹8.95 lakh, while the second one would amount to ₹10 lakh. 

Ref

https://www.thehindubusinessline.com/opinion/columns/all-you-wanted-to-know-about-total-expense-ratio/article10046609.ece



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