Today, a larger population has become financially prudent and makes various kinds of investments. With the rise of fintech, investing has become extremely convenient for everyone. Mutual funds are a popular investment option for investors because they tend to give relatively high returns than other investment options like fixed deposits and carry a slightly lesser risk than some equity investments. However, they also carry some additional expenses.
As an investor, it is important to understand each aspect of the investment to make accurate calculations of the returns. Through this article, investors can learn everything that they need to know about the expense ratio of a mutual fund.
What is an Expense Ratio?
A mutual fund is a group of assets (like securities of different companies) that is maintained by asset managers. To keep tabs on these assets and maximize the returns of the fund, these asset managers charge an annual fee. Expenses may also include the amount paid to analytics, auditors, and marketers that make the mutual fund a success.The expense ratio is the annual fee that a mutual fund takes from the investors for the services it provides. These are the operating expenses of the mutual fund represented as a percentage of the total assets. Typically, smaller mutual funds tend to have higher expense ratios since they will have to recover their expenses from a smaller asset base. At the same time, larger mutual funds tend to have slightly lower expense ratios since they have more assets to set off the expenses against.
SEBI’s mutual fund regulations permit charging these operating expenses that are directly or indirectly used in the management of the mutual fund scheme. These may include sales and marketing expenses, advertising expenses, transaction-related expenses, administrative costs, investment management fees, fees paid to the registrar, and audit fees. A sum of these expenses and any other similar expenses are divided by the net assets of the fund to give the Total Expense Ratio (TER).
Since it is the representation of a cost, a higher expense ratio signifies lower profits, and a lower expense ratio signifies higher profits. The expense ratio also factors in the duration and maturity of a mutual fund. This could be an indicator for investors to analyze the health of the mutual fund that they wish to invest in. Furthermore, the expense ratio is required to be updated and disclosed every day.
Also Read: What Is Security Transaction Tax In Mutual Funds?
How much should the Expense Ratio be?
As per SEBI regulations, there is a specified limit within which the expense ratio has to be. However, there is no limit to which type of expense is allowed to be counted as an expense for the purpose of calculating the Total Expense Ratio. Regulation 52 of the SEBI regulations around mutual funds is what governs the limits that any mutual fund’s Total Expense Ratio is not permitted to cross. These are revised from time to time.From April 1, 2020, the total permissible limits of the Total Expense Ratio are as follows.
| AUM (Assets Under Management) | Maximum Total Expense Ratio for Equity Funds | Maximum Total Expense Ratio for Debt Funds |
| Up to the first Rs. 500 crores | 2.25% | 2% |
| Up to the next Rs. 250 crores | 2% | 1.75% |
| Up to the next Rs. 1,250 crores | 1.75% | 1.50% |
| Up to the next Rs. 3,000 crores | 1.60% | 1.35% |
| Up to the next Rs. 5,000 crores | 1.50% | 1.25% |
| Up to the next Rs. 40,000 crores | The total expense ratio should reduce by 0.05% for every Rs. 5,000 crores assets added. | The total expense ratio should reduce by 0.05% for every Rs. 5,000 crores assets added. |
| Above Rs. 50,000 crores | 1.05% | 0.80% |
What are the components of the Expense Ratio?
There are no limitations on the nature of expenses that can be included as part of the expense ratio. The following are the typical components of an Expense Ratio.- Maintenance Expenses: This refers to the cost incurred to facilitate seamless operations and administrative duties as part of the daily responsibilities of the fund. Maintenance fees could go towards managing proper records, ensuring accurate entry and exit fees of portfolio assets, handling customer support and other such essential services.
- Management Fee: This refers to the cost incurred specifically and directly for the fund managers and portfolio managers contributing towards the mutual funds. This involves market research and analytics to get accurate results. Typically, around 0.5% to 1% of the expense ratio is allocated towards management fees alone.
- 12B-1 Fee: This refers to the cost of advertising and promotions to spread the information about the mutual fund. The expense incurred to onboard a new investor is also included in this fee.
- Entry Load: This refers to the amount that an investor pays to the mutual fund at the time of joining. It has an impact on the returns that the investor makes. This entry load could be different for different mutual funds, but the entry load is not allowed to be included in the calculation of the total expense ratio.
- Brokerage Fee: Typically, there are two categories of mutual funds which are and regular mutual funds. Regular mutual fund plans are when the asset management company employs a broker to process the transactions related to the mutual fund. Direct mutual funds process the transactions themselves. Therefore, brokerage fees in the case of regular funds are a component of the expense ratio.
- Exit Load: Just like an entry load, exit load refers to the amount payable by the investor when they withdraw funds from the mutual funds. This is calculated on the total amount of investment and is typically around 2% to 3% to dissuade people from withdrawing funds.
Also Read:Fixed deposits vs mutual funds
Impact of Expense Ratio on Returns from Mutual Fund
Expense Ratios represent the expenses that will be reduced from the total revenue of the mutual fund. Therefore, the amount distributed to the investors will be determined after reducing these expenses. Hence, a higher expense ratio is a sign of lower returns, and a lower expense ratio gives higher returns. For example, if an investor makes an investment of Rs. 1,00,000 in two mutual funds but the expense ratios are 2% and 1%, respectively, the actual returns that the investor gets will be reduced by Rs. 2,000 (2% of Rs. 1,00,000) and Rs. 1,000 (1% of Rs. 1,00,000) which is a Rs. 1,000 difference just for 1% higher expense ratio. Therefore, expense ratios are an important factor to consider before making investments in mutual funds.Expense ratios are an annual charge. Therefore, if the investment is made for less than one year or more than one year, the expenses deducted from the returns will be calculated proportionately. It is also calculated on the current value of the amount invested on a daily basis. For instance, if the amount invested is Rs. 1,00,000 on 02 April and the expense ratio is 1%, the expense payable on that day will be Rs. 2.74 (Rs. 1,00,000*1%/365). Now, if the amount invested increases to Rs. 1,00,700 on 15 October, the expense payable will be Rs. 2.93 (Rs. 1,07,000*1%/365) for that day. Now, if the value becomes Rs. 99,000 on 21 December, the expense payable will be Rs. 2.71 (Rs. 99,000*1%/365) for that day. Therefore, profit or loss from the mutual funds doesn’t matter. The investor will still have to incur the expense.
Active and Passive Mutual Funds
Often investors believe that expense ratios for actively managed mutual funds are higher because more work is being put into ensuring maximized returns from the fund. However, this may not be entirely true, as a higher expense ratio alone is not indicative of a well-managed fund. Mutual funds with low expense ratios could also have trained managers with tools to make accurate predictions that yield good returns. On the flip side, an aggressively managed fund may also yield higher returns that compensate for the higher expenses. Therefore, investors must look at the functionality, past performance, expense ratio and expected returns before choosing to invest in a mutual fund.FAQ
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What is the most ideal expense ratio ?
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Can mutual funds increase an expense ratio ?
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How does an investor pay the expenses ?
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Does the Net Asset Value (NAV) indicate the amount from which the expenses have been reduced ?
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Can an investor avoid paying the expenses of a mutual fund ?
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All product and facilities marks contained on or associated with the facilities that are not the Website marks are the trademarks of their respective owners. The Website would require you to respect the same. References to any such names, marks, products or facilities of third parties or hypertext links to third party sites or information does not imply the Website’s endorsement, sponsorship or recommendation of the third party, information, product or facilities.
Promotional Offers
You may receive from time to time, announcement about offers with intent to promote this Website and/or facilities/products of ABC Companies (“Promotional Offers”). The Promotional Offer(s) would always be governed by these Terms of Use plus certain additional terms and conditions, if any prescribed. The said additional terms and conditions, if prescribed, would be specific to the corresponding Promotional Offer only and shall prevail over these Terms of Use, to the extent they may be in conflict with these Terms of Use. The Website reserves the right to withdraw, discontinue, modify, extend and suspend the Promotional Offer(s) and the terms governing it, at its sole discretion.
Charges for use of Website
There are no charges or fees to be paid by you for use of this Website. However, you are responsible for all telephone access fees and/or internet service fees that may be assessed by your telephone and/or internet service provider. You further agree to pay additional charges, if any levied by Third Party Service Provider(s), for the facilities provided by them through the Website (Additional Charges).
No Endorsement
You are advised to be cautious when browsing on the internet and to use good judgment and discretion when obtaining information or transmitting information. From this Website, users may visit or be directed to third party web sites. The Website makes no effort to review the content of these web sites, nor is the Website or its licensors responsible for the validity, legality, copyright compliance, or decency of the content contained in these sites.
In addition, the Website does not endorse or control the content of any other user and is not responsible or liable for any content, even though it could be unlawful, harassing, libelous, privacy invading, abusive, threatening, harmful, vulgar, obscene or otherwise objectionable, or that it infringes or may infringe upon the intellectual property or other rights of another. You acknowledge that the Website does not pre-screen content, but that the Website will have the right (but not the obligation) in their sole discretion to refuse, edit, move or remove any content that is available via the facilities.
Electronic Communications
These Terms of Use and any notices or other communications regarding the Facilities may be provided to you electronically, and you agree to receive communications from the Website in electronic form. Electronic communications may be posted on the Website and/or delivered to your registered email address, mobile phones etc either by Facilities Provider or ABC Companies with whom the services are availed. All communications in electronic format will be considered to be in "writing". Your consent to receive communications electronically is valid until you revoke your consent by notifying of your decision to do so. If you revoke your consent to receive communications electronically, the Facilities Provider shall have the right to terminate the facilities.
Assignment
You shall not assign your rights and obligations under this Agreement to any other party. The Website may assign or delegate its rights and/or obligations under this Agreement to any other party in future, directly or indirectly, or to an affiliated or group company.
Legal Disclaimers
The information provided on or through the Website is for general guidance and information purposes only and they do not in any manner indicate any assurance or opinion of any manner whatsoever. Any information may be prone to shortcomings, defects or inaccuracies due to technical reasons. Certain information on Website may be on the basis of our own appraisal of the applicable facts, law and regulations in force at the date hereof.
The information (and opinions, if any) contained on the Website may have been obtained from public sources believed to be reliable and numerous factors may affect the information provided, which may or may not have been taken into account. The information provided may therefore vary (significantly) from information obtained from other sources or other market participants. Any reference to past performance in the information should not be taken as an indication of future performance. The information is dependent on various assumptions, individual preferences and other factors and thus, results or analyses cannot be construed to be entirely accurate and may not be suitable for all categories of users. Hence, they should not be solely relied on when making investment decisions. Your investment or financial decision shall always be at your own discretion and based on your independent research; and nothing contained on the Website or in any information would construe ABCL/ABC Companies or any of its employees/authorized representative as having been in any way involved in your decision making process. Any information and commentaries provided on the Website are not meant to be an endorsement or offering of any stock or investment advice.
Nothing contained herein is to be construed as a recommendation to use any product, process, equipment or formulation, in conflict with any patent, or otherwise and Facilities Provider / ABCL/ABC Companies makes no representation or warranty, express or implied that, the use thereof will not infringe any patent, or otherwise. Information on this Website sourced from experts or third party service providers, which may also include reference to any ABCL Affiliate. However, any such information shall not be construed to represent that they belong or represent or are endorsed by the views of the Facilities Provider or ABC Companies. Any information provided or sourced from ABCL Affiliate belongs to them. ABCL is an independent entity and such information from any ABCL Affiliate are not in any manner intended or to be construed as being endorsed by ABCL or Facilities Provider. The information does not constitute investment or financial advice or advice to buy or sell, or to endorse or solicitation to buy or sell any securities or other financial instrument for any reason whatsoever. Nothing on the Website or information is intended to constitute legal, tax or investment advice, or an opinion regarding the appropriateness of any investment or a solicitation of any type. Investment in the securities market and any financial instruments are inherently risky and you shall always assume complete and full responsibility for the outcomes of all the financial or investment decisions that you make, including but not limited to loss of capital. You are therefore advised to obtain your own applicable legal, accounting, tax or other professional advice or facilities before taking or considering an investment or financial decision.
No Solicitation
No Information at this Website shall constitute an invitation to invest in ABCL or any ABC Companies. These are meant for general information only or to meet statutory requirements or disclosures. ABCL or any of its employees are in no way liable for the use of the information by you, when making any decision or investing or trading through any investment vehicles or ABC Companies, or any other third party which may be engaged in offering of these services.
The information contained on this Website does not represent and should not be used to construe (i) the terms on which a new transaction would be entered into by ABCL or ABC Companies, (ii) the terms on which any existing transactions could be unwound by ABCL or ABC Companies, (iii) the calculation or estimate of an amount that would be payable following an early termination of any past/existing transactions or (iv) the valuations given to any transactions by ABCL or ABC Companies in their books of account for financial reporting, credit or risk management purposes.
Statutory Disclosure
ABCL and ABC Companies are engaged in a broad spectrum of activities in the financial services sectors. You understand and acknowledge that Aditya Birla Money Limited (‘ABML’), Aditya Birla Finance Limited (‘ABFL’) and Aditya Birla Sun Life Asset Management Company Limited and trustees and sponsor of Aditya Birla Sun Life Mutual Fund (‘ABSLMF’) are group companies and ABML / ABFL also acts as a distributor of ABSLMF. Any recommendation or reference of schemes of ABSLMF if any made or referred on the Website, the same is based on the standard evaluation and selection process, which would apply uniformly for all mutual fund schemes. You are free to choose the execution facilities in the manner deemed fit and proper and no commission will be paid by ABSLMF to ABML / ABFL if you choose to execute a transaction with ABSLMF on the Website, unless otherwise agreed by you and ABML/ABFL separately. Information about ABML/ABFL, its businesses and the details of commission structure receivable from asset management companies to ABML/ABFL, are also available on their respective Website.
Similarly Aditya Birla Money Insurance Advisory Services Limited and Aditya Birla Insurance Brokers Limited are insurance intermediaries and engaged in the distribution of Insurance Products and it may services may include products of Aditya Birla Sun Life Insurance Company Limited and Aditya Birla Health Insurance Company Limited. However there is no conflict on these services and commissions if any payable are in accordance of the extant regulations.
Force Majeure
The Facilities Provider, ABC Companies and any of its Third Party Service Providers shall not be liable for any delay or failure in performance resulting directly or indirectly from acts of nature, forces, or causes beyond their reasonable control, including, without limitation, Internet failures, computer equipment failures, telecommunication equipment failures, other equipment failures, electrical power failures, strikes, virus, other malicious computer code, hacking, labour disputes, riots, insurrections, civil disturbances, shortages of labour or materials, fires, flood, storms, explosions, acts of God, war, earthquake, governmental actions, orders of domestic or foreign courts or tribunals, non-performance of third parties, or loss of or fluctuations in heat, light, or air conditioning.
Indemnification
You agree to protect and fully compensate Facilities Provider, ABCL, ABC Companies, subsidiaries, licensors, suppliers and facilities providers, employees, officers and directors, from any and all third party claims, liability, damages, expenses and costs (including but not limited to reasonable attorneys fees) caused by or arising from your use of the facilities, your violation of the Terms of Use or your infringement, or infringement by any other user of your account, of any intellectual property or other right of anyone.
No Waiver
The Facilities Provider, ABC Companies or any of its third party service providers and processor bank/merchants etc. shall not be deemed to have waived any of its/their rights or remedies hereunder, unless such waiver is in writing. No delay or omission on the part of Facilities Providers and ABC Companies, in exercising any rights or remedies shall operate as a waiver of such rights or remedies or any other rights or remedies. A waiver on any one occasion shall not be construed as a bar or waiver of any rights or remedies on future occasions.
Exclusive Agreement
You agree that these Terms of Use are the complete and exclusive statement of agreement supersede any proposal or prior agreement, oral or written, and any other communications between you and the Facilities Provider and its Third Party Service Providers or processor bank/merchants relating to the subject matter of these Terms of Use. These Terms of Use, as the same may be amended from time to time, will prevail over any subsequent oral communications between you and the Website and/or the processor bank.
Termination
Either party can terminate this Agreement by notifying the other party in writing. Upon such termination You will not be able to use the facilities of this Website.
Governing Law and Jurisdiction
The Website specifically prohibits you from usage of any of its facilities in any countries or jurisdictions that do not corroborate to all stipulations of these Terms of Use. The Website is specifically for users in the territory of India. In case of any dispute, either judicial or quasi-judicial, the same will be subject to the laws of India, with the courts in Mumbai having exclusive jurisdiction.
These Terms and Conditions are governed by and to be interpreted in accordance with laws of India, without regard to the choice or conflicts of law provisions of any jurisdiction. You agree, in the event of any dispute arising in relation to these Terms and Conditions or any dispute arising in relation to the Website whether in contract or tort or otherwise, to submit to the jurisdiction of the courts located at Mumbai, India for the resolution of all such disputes.
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