Expense ratio calculator
Thus, investing in direct plans is the smarter way of investing. This is your hard-earned money that must be saved.
Hence, as the investment value grows, so does your expense ratio contribution. Instead, it is a % of the investment value. Also, please remember, the expense ratio is not static. This difference of around Rs 33,000 over five years can compound and increase manifold as the years go by due to compounding. This is because the expense ratio for the regular plan is higher, thus, reducing your returns. Let us take a mutual fund expense ratio calculation example for Axis Bluechip Fund to understand the impact of the expense ratio on the returns.Īs you can see, both the annualized returns and the maturity corpus vary for regular and direct plans. Impact of Expense Ratio on Mutual Fund Returns A return of 7% with an expense ratio of 2% will be reduced to 5% and won’t be good enough to beat inflation.Ĩ. The expense ratio impacts debt funds more because of the relatively lower returns. For example, if you are looking at two large-cap equity funds A and B, with similar holdings and investment objectives and expense ratios of 1.5% and 2%, respectively, your choice will clearly be fund A. If you are looking at two similar mutual funds, the expense ratio can be one of the factors to decide which fund to invest in. Over some time, this commission has the potential of significantly lowering your returns. Hence, the commission to the distributor also becomes a part of the expense ratio. This is because while you invest in a direct fund through the AMC or platforms like ET Money, regular mutual funds are distributed through mutual fund distributors. The expense ratio of a regular fund is higher than a direct fund.
A fund with a lower expense ratio can be equally or more capable of producing better returns. At the same time, a higher expense ratio does not imply it’s a better mutual fund. It is evident from the examples above that the higher the expense ratio, the lower your returns will be. Now that you have understood the expense ratio meaning let us understand its importance in your mutual fund journey. Know: Which Is Better – Actively Managed Mutual Funds or Passively Managed Index Funds? 7. Other than close-ended equity-oriented or interval schemesĮxchange-Traded Funds (ETFs)/ Index Fundsįund of funds (FoFs) that invest in actively managed equity schemesįund of funds (FoFs) that invest in actively managed other than equity schemesįund of funds (FoFs) that invest in liquid funds, index funds, or ETFs For passively managed and closed-ended mutual fundsĬlose-ended equity-oriented or interval schemes.Total Expense Ratio (TER) limit for other than equity schemesĠ.05% total expense ratio reduces with every increase of Rs 5000 Cr of daily net assets Total Expense Ratio (TER) limit for equity schemes The Securities and Exchange Board of India has levied some limits to the various types of mutual funds when it comes to the expense ratio. Know: What is the difference between Regular and Direct plans? 6. The former part about marketing and pamphlet distribution also comes under the 12B-1 fee.īroadly speaking, the costs mentioned above comprise the mutual fund expense ratio. Hence, investment in direct funds via ET Money will prove to be cheaper than regular funds. This fee is also known as the brokerage fee. The cost component for intermediaries is lesser for direct funds and higher for regular funds because when you invest in a regular fund, there are costs for brokers like the distributors. Marketing/Distribution fee – The costs pertaining to the mutual fund's marketing, creating awareness, and then getting it distributed through mutual fund distributors are a part of the expense ratio. Any cost pertaining to audits, registration, and transfers, legal checks, etc., are also a part of the expense ratio. Legal/Audit fee - Mutual funds are governed by the Securities and Exchange Board of India, and hence, complying with all the regulations and laws, they need constant legal intervention and audits of their processes, schemes, etc. For passively managed funds, this component of the mutual fund expense ratio is far lower than actively managed, because the fund manager need not actively manage the fund’s portfolio in the former. Such actively managed mutual funds’ expense ratio includes the compensation to the fund manager as a part of the expense ratio. There can be multiple types of expenses associated with a mutual fund expense ratio, like-įund Manager’s fee - Every mutual fund comes with an investment objective and it is the fund manager’s decisions that ensure that these objectives are met.