mutual fund
Most investors investing in mutual fund schemes look at past returns. Very few investors look at the expense ratio of a mutual fund scheme before investing in it, whereas it has a direct impact on the returns. If understood in simple words, low expense ratio means high profit and high expense ratio means loss. After all, what is expense ratio and how its excess is a loss-making deal for investors, let us understand.
What is expense ratio?
Expense ratio is the annual fee that mutual funds charge their investors, calculated as a percentage of the fund’s total assets under management (AUM). This fee is charged to investors for various costs including management, administrative and operating expenses.
How is the return affected?
Expense ratio has a direct impact on the returns you get from your mutual fund investments. High expense ratio reduces the net returns you get, meaning that a significant portion of the fund’s earnings goes into covering its costs. Over time, even a small difference in the expense ratio can significantly impact the growth of your investments.
Take special care of expense ratio while choosing a fund
While evaluating mutual funds, it is essential to compare the expense ratios of similar funds. Low expense ratios are generally preferred as they allow more of the fund’s returns to remain with the investor. However, ensure that the management quality and services of the fund are not compromised in the pursuit of low costs. Financial planners say that to get maximum returns on mutual fund investments, it is important to pay attention to the expense ratio. Always compare expense ratios of similar funds and weigh them with the fund’s performance and strategy. A balanced approach ensures that your investments are in line with your financial goals and minimize unnecessary costs.
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