Know The Expense That You Pay For Investing Through Mutual Funds
The total expense ratio, or the amount of expenses that are incurred by a mutual fund scheme, can directly impact returns earned.
It is vital for an investor putting money into a mutual fund to look at the total expense ratio, also called the expense ratio. It is a figure that is out of sight but has a direct impact on the returns that are finally earned.
This ratio shows the amount of expenses that are incurred by a mutual fund scheme. This figure is however not high on investors radars because they tend to concentrate their attention on the returns that are being generated.
The impact of the total expense ratio is huge, and it is worth the effort to know more about this ratio and how things are changing with respect to its calculation.
A Percentage Figure
The TER gives an idea of the annual percentage figure that goes towards the expenses of running a fund.
The expenses included in the ratio consist of sales and marketing expenses, advertising expenses, fund management fees, and even other administration costs that are incurred for running the fund. A percentage figure means that this much of the return is actually going towards the expenses of the fund.
A smaller amount is always preferable to a higher one because it means the investor will bear a smaller burden.
Not Collected Separately
The expense ratio isn't collected separately; it's part of how the net asset value, or NAV is calculated.
This means that the NAV figure seen every day is adjusted for expenses, and then the net figure is shown to the investor. The investor thus does not come across the amount, but without even knowing about it, they are bearing the cost of the running of the fund, and this indirectly becomes their expense at the end of the day.
A lower TER means that the final return of the fund will be higher for the same level of performance.
Limit Set Is Not Actual Expense
The market regulator has clear guidelines in terms of how much the fund can charge for a specific scheme.
Two factors are important: the first is that there is a maximum amount that can be charged, and the second is that this is dependent on the type of fund and the amount of the assets that are managed by the fund.
As the asset size rises, the percentage that can be charged on the assets keeps falling. The other factor to consider is that this is a maximum limit, so there are a lot of funds that end up charging a lower amount as compared to what is permissible. This kind of situation is good for the investor because they are being charged less.
Direct Plans And Passive Funds
There are two main distinctions that need to be made with respect to the TER.
One is that for direct plans, since there is no commission being paid to the distributors, the amount of the TER will be less as compared to a regular plan. This is the reason that one can experience a higher return with direct plans as compared to a regular plan.
The other thing is that the expense ratio is also lower for passive funds as compared to active funds. This is because passive funds do not require active management by a fund manager, leading to a reduction in the cost involved in this effort.
Return And Expense Ratio
The higher the number of items that are covered under the definition of the TER, the better it is for the investor.
Ultimately, this figure has to be seen in conjunction with the return of the scheme.
Just having a lower expense ratio is no help if the performance is also not good, but a lower expense with a better performance can be really beneficial for the investor in terms of a higher return at the end of the day.