What is an Expense Ratio in mutual funds?

What is an Expense Ratio in mutual funds?

What is the Expense Ratio in Mutual Funds?

The Expense Ratio is the annual fee charged by a mutual fund to cover its operational costs. These costs include fund management fees, administrative expenses, registrar and transfer agent fees, distribution costs, and even marketing or advertising charges.

This fee is expressed as a percentage of the fund’s average assets under management (AUM) and is deducted on a daily basis from the fund’s net assets.

For example, if a mutual fund has an expense ratio of 1%, it means ₹1 is charged annually for every ₹100 invested in the fund. A lower expense ratio is generally better for investors, especially in long-term investing, as it reduces the drag on returns.

Why it matters:

  • It directly impacts your net returns.
  • Different mutual funds (active vs passive) have different expense structures.
  • SEBI regulates the maximum allowable limits based on the fund size.

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