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Mutual Funds में EXPENSE RATIO क्या होता है? | Financial Advice | SST Ep02 - YouTube
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[Intro Music]
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Just think, after having invested
in mutual funds for 20 years,
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if you come to know that
there was another mutual fund
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whose expense ratio was 0.5%
less than your mutual fund
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and because of this you have
incurred a loss of lakhs of rupees
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which you could have saved had
you invested in the 2nd mutual fund,
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then you will feel terrible. That's why it's
important to know about the expense ratio
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In today's Smart Stock Tip
Episode 2
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I will explain everything
about expense ratio
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First, let's talk about what
expense ratio is
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When you invest in mutual funds,
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an expert Fund Manager manages
your money by using his skills
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Alongside, an AMC spends on advertising
to promote its mutual fund
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In return, the fund manager
charges you a Fund Management Fee
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Additionally, an AMC charges Distributor's
Commission, Registration Fee, Advertisement Expenses
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The total of these expenses
is known as the 'Expense Ratio'
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This is deducted annually as a
percentage of your investment amount
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As per SEBI guidelines, this annual percentage
can go up to 2.5% on equity mutual funds
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and 2.25% on debt mutual funds.
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Note that while it is an annual percentage,
the deduction is made on a daily basis
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Suppose you invested Rs.100
in mutual funds today
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Before your money is even invested, the
expense ratio for today will be deducted
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If the expense ratio is 2%, the amount
deducted per day is 2% of 100 divided by 365
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After deducting this amount, your investment
is started with the leftover money
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This indicates that the NAV, i.e.
price of one unit of the mutual fund
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is calculated only after your
expense ratio has been deducted
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So if you come across a mutual fund
which gives a 15% profit on its NAV,
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it's the actual profit amount because expense
ratio is deducted before calculating NAV
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and there are no cuts made after that
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So, the expense ratio is deducted
daily on your investment amount
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Now, friends, 2.5% might
not sound like a lot.
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Let's take an example. Say you invest Rs.1 Lakh
in a mutual fund with a 2% expense ratio
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The expense ratio comes out to
Rs.2000, which is not a big deal.
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But one crucial thing you're
forgetting is the power of compounding.
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The power of compounding is the reason
why one invests in mutual funds
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We want to create wealth using this power
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But the thing is, the expense ratio is
also compounding along with the wealth
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Your investment will keep increasing each
year and the expense ratio is deducted daily
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When you add the deductions for the entire
period while selling the fund,
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It comes out to be lakhs of rupees,
which can cause a loss for you
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As an example, let's take
2 mutual funds - A and B
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Mutual Fund A has an expense ratio of
2.5%, while B has a 1% expense ratio
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You invest Rs.1 Lakh in each mutual fund,
and both have a 12% rate of return
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After 15 years, Mutual Fund A yields
Rs.3,74,000, while B yields Rs.4,70,700
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Hence, investing in A and not B
results in a 20% loss in earnings
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If I compare fund A with a Mutual
Fund C, which has a 0% expense ratio
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then the loss in earnings becomes 32%
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This means that for an Rs.100 profit,
Rs.32 gets consumed in the expense ratio
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Now, let's understand this through SIP
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Mutual Funds A and B have expense
ratios of 1.29% and 2.15% respectively
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The expected rate of return is 12% for both. SIP for
Rs.5000/month for 25 years is started on both
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After 25 years, A will yield Rs.80 Lakh,
while B will yield Rs.68.9 Lakh
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This means a difference of
Rs.11 Lakh in yield,
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while the expense ratios don't
even have a 1% difference
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Hence, a less than 1% difference translates
to an Rs.11 Lakh difference in earnings
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You can easily save this by paying attention
to the expense ratio before investing
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Now the question arises, is a mutual fund
with a higher expense ratio totally worthless?
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If you invest in an equity mutual fund,
you can find great mutual funds
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These have good track record and performance,
and skilled and experienced fund manager
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A mutual fund like this gives high returns
even if it has a higher expense ratio
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But if you invest in a Debt mutual fund,
where the average rate of return is 8%-9% only
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There, an expense ratio of 2%
is extremely unprofitable
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Hence, if you're investing in a debt mutual
fund, find one with the lowest expense ratio
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Similarly, if you're investing in a direct
fund, they generally have a low expense ratio
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Whereas regular funds have
higher expense ratios
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This is because direct funds don't involve the
distributor's commission but regular has it
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Now that we know that expense ratio can
be costly if one invests inattentively,
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naturally, we would want to
avoid incurring any other expenses
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One such additional expense
could be the brokerage.
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Nowadays, there are a lot of apps that give
the option of investing in mutual funds
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Without charging any brokerage.
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One such app is Kuvera.
This app is free to use,
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and you can add and manage the investments
of all your family members in a single place
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This app makes it very easy
to track your investments
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If you download the app using the link
in the description box, and use code 'LLAYT'
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You get 100 points which you can use to
buy the app's premium features free of cost
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