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Expense Ratio And Mutual Funds: All You Need To Know

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Expense Ratio And Mutual Funds: All You Need To Know
Rajat Mishra - 01 March 2020

Nowadays, every youngster wants to invest their money in mutual funds and they usually stumble upon one or the other advertisement aired on TV that goes by saying, “Mutual Funds are subject to market risk.” That is their first tryst with the mutual funds, quite demotivating as well as intimidating. But that is not only the sole reason for their reluctance to invest in mutual funds.

But there is another roadblock in their way, that is they do not have much exposure to mutual funds their type and how should they talk about it. The prominent reason behind this is that they are born and brought listening to traditional investing avenues. Let us quickly break down for you what are equity mutual funds?

There are numerous classifications of mutual funds on the basis of various parameters. But one of the most attractive classes of mutual funds is an equity mutual fund.

Equity Mutual Funds

This is a class of mutual funds that invest largely in the stock market or in the stock of all the companies across the market capitalisation. This class is also expected to get a good return but there is not everything rosy about this class. As equity mutual funds are considered as one of the riskiest classes of mutual funds. The performances of mutual funds depend on the performance of the stock of companies.

Equity Funds invest over 60 per cent of their assets in the equity shares of various companies. And the rest of the assets are invested in debt instruments and money market instruments.

Expense Ratio

One of the key things that investors look at while investing their money in equity mutual funds is the expense ratio. The expense ratio is a management and operation cost charges by the fund house. The market regulator Sebi in its meeting in 2018 announced changes in the expense ratio of mutual funds and set the ceiling for the expense ratio. That step of Sebi resulted in the creation of the slabs on the basis of assets under management. For the first Rs 500 crore, they can charge 2.25 per cent for Rs 500 to Rs 750 crore, 2 per cent for Rs 750 crore to Rs 2,000 crore and so on.

But a question here is how is the expense ratio going to impact you?

Actually, lower the expense ratio wills the greater will be profitability. Let take an example supposes someone is investing around Rs 10000, which has an expense ratio of 3 per cent. That means you need to shell out Rs 300 as an expense ratio. And in condition, if you will get a return around 16 per cent and with an expense ratio of 3 per cent you will be earning a return capital of 13 per cent.

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