‘Mutual Funds Sahi Hai’ is now a well-known truth among investors.
This is evident in the share of individual investors’ funds in the mutual fund industry’s assets under management (AUM), particularly in equity-oriented funds, as well as the amount of inflows, and the rise in folios.
But like with any investment you make, there is a cost of investing involved in mutual funds. There are no free lunches.
The cost is reflected in the expense ratio.
What is an Expense Ratio?
A mutual fund house incurs several costs to run a scheme.
These include investment management fees, brokerage/transaction costs, administrative expenses, sales & marketing expenses, registrar fees, custodian fees, audit fees, etc.
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All these costs are subsumed into what is known as Total Expense Ratio (TER) to manage the fund. The TER is charged as a percentage of the fund’s daily net assets.
Every mutual fund scheme levies a TER.
How is the TER Calculated?
It is calculated as follows:
Total Expense Ratio (TER) = (Total Expenses of the Scheme during the period / Total scheme assets) x 100
Basically, the TER is calculated as a percentage of the scheme’s average Net Asset Value (NAV).
What is the Maximum TER a Fund Can Levy?
The following is the maximum TER that actively managed equity funds and debt funds can levy, as per the SEBI Mutual Fund Regulations.
Assets Under Management (AUM)Maximum TER as a percentage of daily net assetsTER for Equity fundsTER for Debt fundsOn the first Rs 500 crores2.25%2%On the next Rs 250 crores2%1.75%On the next Rs 1,250 crores1.75%1.5%On the next Rs 3,000 crores1.6%1.35%On the next Rs 5,000 crores1.5%1.25%On the next Rs 40,000 croresTotal expense ratio reduction of 0.05% for every increase of Rs 5,000 crores of the 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 crores1.05%0.8%
(Source: www.sebi.gov.in)
In case of the passively managed funds, the TER limits currently are:
- 2.25% for equity Fund of Fund schemes
- 2% for non-equity Fund of Fund schemes
- 1.25% for a close-ended equity scheme or interval scheme
- 1% for non-equity-oriented close-ended or interval schemes,
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