A closer look at expense ratios in Mutual Funds
When you hear the term “expense ratio,” you might be thinking of complicated formulas or calculations. While there are some calculations involved, understanding them is fairly simple. This article gives you a breakdown of expense ratios to help you understand why you should be paying attention to them if you’re planning to invest in mutual funds.
Management Expense Ratios
An expense ratio is simply a measure of what it costs an investment company to keep a mutual fund in operation. This ratio is determined by an annual calculation. A management expense ratio is the cost a firm incurs to manage a mutual fund. It’s calculated by dividing the operating costs by the average rupee value of the fund’s assets under management. A stock expense ratio uses the same formula, but applies this to stocks instead of asset funds.
How Things Work
These are the components that make up an expense ratio.
- Management Fee: Fees given to the firm managing the mutual fund.
- Administrative Costs: Costs associated with keeping records, mailing important documents, etc.
- 12b-1 Distribution Fee: The money needed to maintain marketing, advertising, and distribution of the fund.
The value of these costs is combined, then divided by the average rupee value of the fund’s assets under management. This amount is then taken out of the fund’s assets to calculate the actual return to the investor. Note that the fund’s trading activity, as well as the buying and selling of portfolio securities is not included in this ratio. When assessing expense ratios with various fund managers, it is important to understand these additional costs. Bajaj Finserv conducts their Mutual Funds Programme with complete transparency, allowing you to easily monitor what is happening with your funds.
Now that we know how expense ratios work, it’s time to understand how to properly conduct a mutual fund expense ratio comparison. This involves comparing various expense ratios to find the fund that will give you the best return on investment. There are many tools online through that can help you analyse expense ratios easily. There are also a number of online fund screeners that can be used for this purpose as well. Bajaj Finserv provides several online tools as well, like their SIP Calculator that can help you determine your rate of return based on several factors.
But what is considered a high expense ratio?
This depends upon the type of fund you are looking at. Index funds generally have the lowest percentage, with some having less than a 0.2% ratio. When choosing a larger company that runs domestically, keep a 1% ratio as your filter. Small companies generally require more research, therefore having slightly higher ratios. A ratio of 1.25% is an ideal limit if you’re selecting one of these companies. Anything above these values would be considered a high mutual fund expense ratio.
Expense ratios are much less complicated than what they might initially seem. Doing extensive research can help you find a good expense ratio that will yield a decent return. Bajaj Finserv can also help you find the right investment opportunity for you by providing highly trained professionals to manage your funds safely and efficiently.