1. What is an expense ratio?
Just like one pays tuition fees to a teacher who uses his knowledge to educate our kids, in the same way, expense ratio functions in mutual funds industry . An expense ratio is a fee charged by a fund house for managing the money of an investor who invests with one or more than one schemes of a fund house.
2. How does it work?
After abolishing entry load on schemes, the Sebi has also put limit on expense ratio a fund house can charge.
Expense ratio is charged in the following fashion: Higher the Asset Under Management (AUM) of a scheme, lower the ex pense ratio and vice versa. It is observed that expense ratio of a scheme hover in the range of 2-3%.
Expense ratio for direct plan of a scheme where distributor is not in volved hovers in the range of 1-1.5%, while for regular plan of the scheme it ranges between 2.5-3%. Expense ratio takes into accounts the costs associat ed with accountants, custodians and other paperwork-related expenses.
3. Should one look at expense ratio of specific category of funds?
Typically , experts suggest that one should look at expense ratio of debt funds more keenly than equity funds. They point out that returns in debt funds are fairly predictable and due to this one should look at the expense ratio. In liquid and income funds, returns hover in the range of 8-10% and hence, after deducting expense ratio one may get lesser returns. In case of equity funds, since returns are driven by markets and corporate performance, the likelihood of higher returns is more.
4. Should one just consider `expense ratio' while investing?
For retail investors, it is impor tant to look at the returns of a scheme and then at its expense ratio. For instance, if a scheme has performance record for the past ten years and has given over 15% returns, and if an investor believes that the scheme can achieve the returns he has wants to achieve, he should not be particular about the expense ratio of an equity scheme. Instead he should invest in the scheme.
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