Do you know how Mutual Funds recover their Expenses?

Have you ever given a thought how Mutual Funds recover their Expenses?

Do they recover it from you before they declare the NAVs of the respective schemes? Are the returns you receive from your mutual funds investments is the net of expenses incurred by them while managing the funds?

Table of Contents:

1. What is Mutual Fund Expense Ratio?
2. What Are Recurring Expenses in Mutual Funds?
3. How Mutual Fund Expense Ratio Impacts Your Returns?
4. What Is Net Expense Ratio in Mutual Funds?
5. Is Expense Ratio Charged Every Year?
6. Average Expense Ratio for Mutual Funds in India
7. SEBI’s Regulation on Mutual Fund Expense Ratio
8. Should Mutual Fund Expense Ratio matter to you?
9. Will My Mutual Funds Recover If Expense Ratios Are High?
10. Where to find the Mutual Fund Expense Ratio?
11. Mutual Fund Expense Ratio and Tenure of the Investment:
12. What is the Ideal Expense Ratio for Mutual Funds?
13. Conclusion

What is Mutual Fund Expense Ratio?

A Mutual fund incurs expenses like fund management fee, agent commissions, registrar fees, and selling & promoting expenses.

Now you know that Mutual Funds incur expenses while managing your funds, the next question in your mind could be how much.

This leads to the concept of mutual fund expense ratio.

The expense ratio of a mutual fund matters because it directly reduces your returns.

‘Mutual Fund Expense ratio’ is nothing but the recurring cost per unit- incurred to operate a scheme – and is charged to your assets.

Such mutual fund expense ratio is calculated periodically but is charged daily on the NAV.

This annual recurring expenses is disclosed every March and September and is expressed as a percentage of the fund’s average weekly net assets.

What Are Recurring Expenses in Mutual Funds?

Recurring expenses in a mutual fund include fund management fees, distributor commissions, registrar charges, advertising, and administrative costs.

These form the basis of the expense ratio and are deducted regularly from the fund’s assets.

How Mutual Fund Expense Ratio Impacts Your Returns?

Mutual Fund Expense ratio helps you to know how much you pay a fund every year to manage your investment.

In case you have invested Rs1,00,000 in a MF, whose mutual fund expense ratio is 1.8%, you are paying Rs1,800 every year to manage your investment.

What Is Net Expense Ratio in Mutual Funds?

The net expense ratio reflects the actual annual costs deducted from your mutual fund returns after adjusting for any fee waivers or reimbursements.

This is what ultimately impacts your take-home returns.

Is Expense Ratio Charged Every Year?

The expense ratio is charged every year, which means it reduces your returns consistently.

That is, if MF is earning, say, 15%, your return would be 13.2%. The NAV’s are declared net of expenses.

It is therefore important for you to know what the expense ratio of a mutual fund is.

A higher mutual fund expense ratio will mean lower return for you and vice versa.

Average Expense Ratio for Mutual Funds in India

On average, mutual funds in India have an expense ratio ranging between 1% to 2.5%, depending on whether it’s an equity or debt fund.

Direct plans usually have a lower ratio compared to regular plans.

SEBI’s Regulation on Mutual Fund Expense Ratio:

Different Mutual Funds have different expense ratio, and to regulate this SEBI has put a cap that a mutual fund can charge, which are:

Net assets	Equity schemes	Debt schemes
First Rs. 500 crore	2.25%	2.00%
Next Rs. 250 crore	2.00%	1.75%
Next Rs. 1250 crore	1.75%	1.50%
Next 3000 Crores	1.60%	1.35%
Next Rs. 5000 Crores	1.50%	1.25%
Next Rs 40000 Crores	Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof.	Total expense ratio reduction of 0.05% for every increase of Rs.5,000 crores of daily net assets or part thereof.
Above Rs. 50,000 crores	1.05%	0.80%

The average expense ratio for mutual funds in India usually falls between 0.80% and 2.25%, depending on the scheme type.

SEBI also provided a recent option for investors to buy funds directly from MFs (not through the distributor). If bought

directly, the NAV, called the direct plan NAV, will not bear the fee paid to distributor.

That means the direct plan NAV will be higher than the regular NAV to that extent.

This way, you may increase your returns on your MF investment.

Should Mutual Fund Expense Ratio matter to you?

In competitive developed countries market it does matter because returns are often in single digits, the mutual fund expense ratio can cause a dent in the amount you can take home.

But in markets such as India, where equity funds have comfortably managed double digit returns, mutual fund expense ratio has not really mattered much, especially in equity funds.

Will My Mutual Funds Recover If Expense Ratios Are High?

Many investors wonder will my mutual funds recover if expense ratios are high, but in the long run, consistent returns matter more than small cost differences.

For instance, the average return of equity funds over the last 10 years was 23 per cent annually.

This return, which is post expenses, is good enough. You may select a reasonably performing mutual fund and may ignore the mutual fund expense ratio.

But in case of a debt fund, mutual fund expense ratio matters. Mutual fund expense ratio plays a crucial role selecting a debt fund to invest.