Mutual Funds do have expenses to make apart from trying to earn you a good return on what you give them to manage. Do you know this?
Do you know that there are quite a lot of fees that they have to pay to distributors (who sells you the MF Units), the advertisements that you get to see in news papers, the big hoardings that you happen to see when you are traveling etc?
While Mutual Fund is a collective investment trust, the day to day expenses of managing the funds will be a necessity. This is handled by a component called Expense Ratio which is explained here in a simple way….
Like a doctor who charges you for his service, mutual funds too charge a fee for managing your money. This involves the fund management fee, agent commissions, fees payable to the Registrar and Transfer Agent (RTA) and for selling and promoting the Mutual Fund Products related expenses.
All this falls under a single basket called expense ratio. To put it in its perspective, expense ratio is the fee charged by the investment company to manage the funds of investor. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent, then you are paying the fund Rs 150 to manage your money.
Though the expense incurred may appear to be small and insignificant, when compounded, it usually impacts the return of a scheme over a long period.
Factors influencing the expense ratio include the size of the fund sales charges, and the management style of the fund. Smaller funds are a natural disadvantage considering they have to spread their expenses over a smaller number of investors. Different Funds have different expense ratios.