Are you planning to invest in a mutual fund soon? Do you want to make enough savings for your future? If you are someone who is planning to invest in a mutual fund in the near future, it is important for you to not only spend ample time and research well before choosing the mutual fund to invest in, but also know all about the relevance and importance of expense ratio in mutual fund.
About Expense Ratio
Just like you pay your house help for their services, even the mutual fund providers charge their management or service fee in the form of expense ratio. In simpler words, it is the service fee that consists of different potential operating costs and expenses for a mutual fund provider like the administrative cost, marketing cost, compliance fees, management fee, etc. Moreover, the expense ratio in mutual fund also comes in a range of variations like net expense ratio, reimbursement expense ratio and gross expense ratio. To know more about expense ratio in mutual fund, check out https://navi.com/blog/what-is-expense-ratio/.
However, one important thing to remember is that this fee or the expense ratio in mutual fund is not an additional cost for the investor that is charged directly from the mutual fund service provider or scheme. The expense ratio percent is actually deducted from your potential total returns on your investment, as an implicit charge, before the final deposit is made in your account. The basic formula to calculate the expense ratio in mutual fund is mentioned below.
Total Expenses divided by Total Assets
Impact of Expense Ratio
After understanding the basic know-how of expense ratio in mutual fund, let us dive into the impact of expense ratio on mutual fund returns for the Indian investors. To understand this better, let us first look into what the expense ratio in mutual fund tells an investor, below.
- The most integral part of mutual fund investment for an investor is how much they are earning as a return and how much they are paying as different charges, including management and/or administration fee. This is exactly what the expense ratio in mutual fund indicates, informing the investor about an estimate of their overall returns on investment.
- Another important thing that determines the impact of expense ratio in mutual fund is the percentage levied on an investor, depending on their total assets in the portfolio and its complete value. The higher the expense ratio, the lower the potential on return on investment and vice versa. Therefore, it is always better to have a lower expense ratio in mutual fund as that assures the investor of higher returns on the invested amount.
- Now, not every mutual fund has the same expense ratio and so it is important to analyse well before choosing any mutual fund to invest in as it will directly impact the potential return value for your investment.
Overall, to conclude, it is important to fully understand the relevance of expense ratio in mutual fund investment in order to become a smart investor. The expense ratio in mutual fund directly impacts your potential earnings as a return on investment and thus, it is crucial to not rush into the decision and choice of which mutual fund scheme to put your money on. Given the increasing popularity of investment in mutual funds, it has become all the more important to participate and jump on this bandwagon to promise yourself a better future with ample savings. So, be a smart investor and research well about expense ratio percentage for different mutual funds before investing in the most appropriate one.
