Mutual Fund Expense Ratio Explained for Beginners
The expense ratio in a mutual fund is the annual fee charged by the fund house to manage your investment. It is expressed as a percentage of the fund’s average assets under management (AUM).
Components of Expense Ratio:
- Management Fees – Fees paid to the fund manager.
- Administrative Costs – Costs for legal, accounting, and record-keeping.
- Distribution Fees (12b-1) – Marketing and distribution expenses (sometimes included).
Formula:
Expense Ratio=Total Annual Expenses/ Average AUM×100
Example:
- Suppose you invest ₹1,00,000 in a mutual fund with a 1.5% expense ratio.
- Annual cost = ₹1,00,000 × 1.5% = ₹1,500
- This ₹1,500 is deducted from your returns throughout the year.
Key Points:
| Aspect | Details |
| Low Expense Ratio | Generally better for long-term investors |
| Direct Plan | Lower expense ratio (no distributor fees) |
| Regular Plan | Higher expense ratio (includes commission) |
| Actively Managed | Usually higher ratio due to research costs |
| Index Funds/ETFs | Usually lower ratio due to passive management |
