What is Expense Ratio?

Presenting Investor Education Originals, where we simplify the basics of personal finance and investing for you. In this video, you will learn how to analyze the cost of a mutual fund with TER.



Whenever you are buying a product— be it a gadget, a dress, a car, or even a house— you compare its costs with its alternatives. Do you do the same while buying a mutual fund?


Most people don’t. Let’s learn how to do the cost analysis while buying a mutual fund scheme. Any mutual funds company bears certain costs while running a mutual fund scheme. This cost can include expenses such as sales & marketing expenses, administrative expenses, transaction costs, fund management fees, registrar fees, custodian fees, audit fees, etc.


They also pass on charges to investors in the form of expense ratios. The total expense ratio (TER) is then deducted from your investment profits. According to SEBI regulations, 2.25% is the highest expense ratio that an MF scheme can charge.


As the size of the MF increases, its assets under management increase & the expense ratio lowers. So you must check TER before investing in any mutual fund scheme.


Did you know? TER in regular mutual funds is much higher than in direct mutual funds.

A direct plan is when you directly buy the MF scheme from the mutual fund house. Therefore, the administrative and marketing expenses are low, so the TER is also lower. Regular plans are those you buy from a mutual fund distributor, in which an individual, online platform, or bank works as a distributor. They have a higher expense ratio because the fund house has to pay commission to the distributors.


In many cases, the difference in expense ratio for the direct and regular plan is more than 1%. It might seem low at first, but when you consider 20-30 investment horizon, the 1% higher ratio difference amounts to a significantly large portion. So be mindful of how much expense ratio you are paying for a mutual fund scheme.





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