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What is Expense Ratio in a Mutual Fund and why is it charged?

Investors are advised to look at the expense ratio charged by a fund house while choosing a mutual fund scheme.

    1. What does an expense ratio cover?

      As the name suggests an expense ratio refers to the expenditure incurred in managing a fund, in short it is per unit cost of managing the fund. An AMC incurs different types of costs like fund management fees, registrar and transfer agent fees, audit fees, custodian fees, marketing and selling expenses including agents commission, etc. The expenses are accrued on daily basis. Thus the expense ratio measures the cost of managing a fund on a per unit basis. Mutual funds declare the daily NAV of a scheme after accruing all such expenses.


    2. Can the AMC’s charge expense ratio as they deem fit?

      SEBI, the regulator who oversees the functioning and sets rules and regulations for the Mutual Fund industry has set a slab based ceiling for expense ratios to be charged on all the schemes. These slabs are given in the scheme information document of all the respective schemes.


    3. Is there an impact on fund returns due to expense ratio?

      The expense ratio gives the investors an idea of how much the fund charges annually in percentage terms to manage his investment portfolio. For example an investment of Rs. 20000/- in a fund with an expense ratio of 2% will mean the investor pays Rs. 400 to the fund to manage his money. Thus, if a funds return is 14% and the expense ratio is 2%, the investor would actually earn a return of 12%. A higher ratio means low Net Asset Value and a lower ratio would mean higher Net Asset Value.

      Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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