What is Expense Ratio?

Quick Links: Website | Play Store | App Store | Instagram | LinkedIn

The expense ratio in a mutual fund is like a fee you pay to the fund manager for handling your investment. The Total Expense Ratio (TER) is essentially the cost of running a mutual fund, expressed as a percentage of the fund’s average Net Asset Value (NAV). When you invest in a mutual fund, some fees are charged to cover the costs of managing the fund. These costs include things like management fees, advertising costs, administrative expenses, fees for auditors and custodians, transaction fees and commission in case of regular mutual funds. All these expenses are combined and referred to as the Total Expense Ratio.

REAL LIFE SCENARIO

Imagine you're planning a road trip to a destination that's miles away. You’re excited to get there, but reaching your goal will take resources: you'll need to buy gas, maybe pay for tolls, stop for food, and cover maintenance costs to ensure your car runs smoothly. These costs don’t change your destination—they’re just the price of getting there.

Similarly, when people invest in mutual funds to reach financial goals—like saving for a house, retirement, or a child's education—the Total Expense Ratio (TER) is like the cost of that financial "trip." The TER includes fees for the fund manager (like paying a driver or navigator to keep you on track), administrative costs (similar to tolls along the way), commission (paying a guide who helps navigate and support you throughout your journey, providing valuable advice and expertise to keep you on the right path) and other necessary expenses like custodial or transaction fees (maintenance and food stops on the road).

If you invest in a mutual fund with a TER of 1.5%, it means 1.5% of your investment each year goes towards these operational expenses, leaving the rest to grow toward your goal. So just as a driver has to pay for fuel, mutual fund investors pay fees to maintain the fund, helping ensure their "investment journey" is professionally managed and aligned toward their financial destination. Just like setting out on a road trip, you want to focus on your destination—not on the minor expenses along the way. That's where we come in. Our app MILES WEALTH is built to streamline the investment process, ensuring your money works as hard as possible toward your goals while managing costs effectively. Instead, you can focus on reaching your ultimate financial destination, whether it's buying a home, building a retirement nest egg, or achieving another important milestone.

RULES AND REGULATIONS

The Securities and Exchange Board of India (SEBI) sets limits on TER based on the size of the fund’s assets (known as Assets Under Management or AUM). For example, if a fund has assets under Rs. 500 crore, the maximum expense ratio allowed is 2.25% for equity funds and 2.00% for debt funds. As the AUM increases, the allowed TER decreases.

There’s also a special incentive to encourage more investors from smaller towns (known as “beyond top 30 cities” or “B30 cities”). If a mutual fund attracts a significant percentage of new investments from these areas, it can charge up to an additional 0.30% TER.

The TER impacts the fund’s performance because all expenses come out of the fund’s assets. A lower TER means more of your money remains invested, potentially giving better returns. This is why TER is an important factor when choosing a mutual fund—it directly affects your investment's profitability.

Lastly, SEBI requires all mutual funds to disclose their TER daily on their websites and on the Association of Mutual Funds in India (AMFI) website so investors can easily compare and make informed decisions.

Conclusion:

If you're considering investing in mutual funds, take a look at our app, Miles Wealth. We specialise in offering personalised mutual funds tailored to your unique risk profile and financial goals. With Miles Wealth, you get a customised investment strategy that aligns with your comfort level and timeline, helping you reach your goals more effectively. Our app simplifies the investment process by recommending funds that match your needs, whether you’re aiming for a major life purchase, retirement, or any other financial milestone. Let Miles Wealth help you invest with confidence and ease, knowing you have a strategy designed just for you.

---

Disclaimer: This blog is for educational purposes only. The securities/investments mentioned here are not recommendations.

P.S. If mutual funds are on your mind, check out Miles Wealth! We make investing easy with personalised mutual funds tailored to your risk tolerance and financial goals. No need to be a finance expert or spend hours researching—just invest in funds that truly fit you. Download Miles Wealth today!

Quick Links: Website | Play Store | App Store | Instagram | LinkedIn

Give it a shot (it’s free) and let us know what you think! Your feedback is super helpful and helps us improve.