What is Expense Ratio in Mutual Fund? (Hindi) - YouTube

Namaskar, in return for managing your funds, mutual fund companies charge a fee which is called an expense ratio

The expense ratio is charged annually. For example, if in a mutual fund scheme the expense ratio is 1% and you are investing 1lakh in that scheme so this means that you are giving 1,000rs to the mutual fund company

And annually you will have to pay this 1% expense ratio. The expense ratio is not separately paid to the mutual fund, as it is deducted while finding the NAV (Net Asset Value)

If you don’t know what NAV is then let me tell you that just like you have shares in a company, in a mutual fund there are units. Similarly, the share price is the price of 1 share like that only NAV is the price of 1 unit.

If you have brought mutual fund units at Rs. 10 NAV and now its NAV is Rs. 15 then you have got a 50% return and this return is after the deduction of the expense ratio.

This is because the expense ratio is deducted while taking out the NAV. Mutual funds NAV are published daily

and expense ratio daily while getting NAV is deducted, thus expense ratio is deducted from the value of your investment every day

Consider that a mutual fund scheme is there whose expense ratio is 1% and you have invested 1lakh in that and this 1%expesne ratio will be charged annually

1 year has 365 days so 1 day’s expense ratio would be 1% divided by 365. So if on the 1st day your investment value increases from 1 lakh to 1,00,100rs then your 1%/365*1,00,100=Rs.2.74 will be deducted.

Next day if your investment value from 1,00,100 goes to 1,00,500 then on that day your 1%/365*1,00,500= Rs. 2.75 will be deducted.

This way on a daily basis, the expense ratio will be deducted from your daily investment value

One more important thing is that while buying and selling shares whatever brokerage charges and other charges are there they are not included in the expense ratio

These charges are also deducted while calculating the NAV. In expense ratio, fund management fees, marketing and distribution expenses, legal and audit expenses etc are included.

In the expense ratio, the main fees are the fund management fees. You can know about any mutual fund scheme expense ratio by that mutual fund factsheet or their website or through the valueresearch.com website can be seen.

In the long term, the expense ratio matters a lot, as due to the compounding effect a lot of benefits can be seen on your investment due to the expense ratio

It’s not that mutual fund schemes with less expense ratio are good. Whether a mutual fund scheme is good or not, is it suiting your investment goals or not, for this you need to understand and analyse different factors.

For instance, the performance of that scheme, skills and expertise of the fund manager, risk and reward of that scheme etc.

It’s not that whatever the expense ratio is shown by the mutual fund scheme will remain the same. As after your investment also the expense ratio of that scheme can be changed.

As per SEBI guidelines, if any mutual fund scheme is increasing its expense ratio then it is mandatory for them to inform its investors regarding this.

Different mutual funds schemes have different expense ratios. So it depends on which category does the mutual fund schemes come and then you can compare the average expense ratio from that category

For example, there is a large-cap mutual fund scheme called ABC whose expense ratio from average large-cap mutual fund schemes is more, so if the track record of ABC mutual fund is exceptional and if that scheme deserves that much expense ratio then

it’s okay, but if it is an average mutual fund scheme and its expense ratio is a lot as per the category then you need to think over it

In an Equity mutual fund, an actively managed mutual fund’s expense ratio from a passively managed mutual fund is a lot

because in actively managed mutual funds, the fund manager himself by research picks the stocks whereas, in a passively managed mutual fund, no research is required by the fund manager, as they just track the indices and funds

they dont have to select the stocks themselves.

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