SUBSCRIBE TO OUR YOUTUBE  

What is Expense ratio in Mutual Funds

by Manish Chauhan · 119 comments

Do you know how expense ratio can impact the returns on your mutual funds returns ? We often hear that expense ratio of a fund is 2% or 1.8%, but we never put lot of thought to understand its impact on our mutual funds returns and our own wealth! Lets touch this topic today in detail. For simplicity, I will talk about Mutual funds in this article, but expense ratio as a concept is applicable in almost all the management financial products like Mutual funds, UlIP’s , NPS etc

Expense Ratio Mutual Funds

What is expense ratio in Mutual Funds?

Let me first clear out what is expense ratio? As an investor we just buy and sell mutual funds, but in the background there are many expenses which a mutual fund (and even ULIP’s) has to incur. Some of which are; fund management fees, agent commissions (trail commissions), registrar fees, and selling and promoting expenses. As per SEBI regulations, the maximum expense ratio of an equity fund can be 2.5% and for a debt fund, it should not cross 2.25%.

Now who will pay for this? Obviously you have to pay for it and that’s where expense ratio comes into picture. Expense ratio is cut from your investments on daily basis from mutual funds and only after that NAV is published and that’s how you pay expense ratio. For Example, If you have invested Rs 1,00,000 in a mutual fund whose expense ratio is at 2% and suppose your mutual fund saw a growth of 0.5% in a day, which turns out to be Rs 500. You NAV won’t be 1,00,500. Before that you will have to pay 2%/365 (that’s 365th part of 2% as charges, as it’s for 1 day, remember 365 days in a year) and that would be, Rs 5.48. Hence, final value of your investment would be 1,00,000 + 500 – 5.48 = 1,00,494.50 that’s 0.4945% increase and not 0.5% .

So, the next question which will come in your mind is “So, does this small deduction really make a lot of difference?” The answer is Yes & No. If you are looking at 6 months or 1-2 yrs, it’s not much of a concern, you can probably just avoid it and answer is Yes, if you are looking from long-term point of view like 5-10-20 yrs. In that case it’s mostly something which you can put your eye on once.

Expense Ratio – With & Without

Let me first give you a very clear idea about the distinction between two scenarios where there was expense ratio and there was no expense ratio in a mutual fund. Let’s take this example at least to understand the concept.

Suppose there was a mutual fund called “Jagoinvestor-Ninja Fund” (attractive name haan!) which generates a 12% return before expense ratio. Now let’s see how this fund final returns will turn out to be in different expense ratio scenarios like 2% , 1.5% , 1% ,0.5% and 0% (imaginary) . Expense Ratio Mutual Funds

Did you see that? How same funds performance can lead to huge a huge difference depending on expense ratio. In a longer term, you can see how the corpus value reached 29.9 lacs without any expense ratio, but if the expense ratio was 2%, then despite the same performance, the corpus would be reduced to only 16.3 lacs. That’s huge deficit of 45% compared to original corpus. While it’s a little unrealistic to consider 0% expense ratio, because it’s not possible in real life. Let’s see the different between 1% and 2% expense ratio. You can see that with 1% expense ratio the corpus was 22 lacs and with 2%, it was 16 lacs, that’s again huge 20% difference.

Also if you see the chart above, you can see a greed part showcasing how low expense ratio cases achieved the same corpus few years early than the high expense ratio scenario. You can see that with 0.5% expense ratio, 16 lacs was the corpus in 26th year itself which took 30 yrs in case of 2% expense ratio. In the chart below you can see how much the difference in different scenario’s final corpus percentage wise was.

Expense Ratio Mutual Funds

Remember that when you compare returns of mutual funds in long run (video), the calculations are shown after-expenses; hence it might happen that a better fund today is better in returns because its expense ratio was lower than the other one. It might happen that two funds differ in returns to some extent, but don’t vary too much when it comes to their ability to generate returns before the expenses. Naturally the mutual funds which have lower expenses would have better return at the end.

Case Study – HDFC Tax Saver vs Canara Robeco Equity Tax Saver

If you look at Valueresearch website, it has given Canara Robeco Equity Taxsaver fund a 5 star rating, but HDFC Tax saver gets just a 4 star. If you look at both these funds history, both the funds are 15 yrs old funds and if you look at short-term performance of both the funds, you will see how Canara Robeco is doing equally good or better than HDFC Tax Saver. But if you look at long-term performance of both the funds, you will notice a big difference.

While HDFC Taxsaver stands with tall chest giving 31% annual return, Canara Robeco seems to stare the earth with just 20% annual return. Now there can be a lot of reasons for this, but if you look at expense ratio, Canara Robeco has as high as 2.49% expense ratio, where as HDFC tax saver has just 1.91% expense ratio. So it might happen that Canara Robeco these days has to perform better than HDFC Tax saver before expense ratio and only then it’s able to sustain the performance.

As per a small study by moneylife, this phenomenon is true across the category , here are the excerpts : –

Consider the performance of 43 equity diversified funds which have been in existence before 2000. We chose 2000 because we wanted to gauge decadal performance of the funds. Of these 43, we selected the 15 most expensive funds and 15 cheapest. Among the expensive lot, we have only seven outperformers and eight underperformers. Whilst among the cheap funds, we have 12 outperformers and only three underperformers. It is not that the expensive funds have not earned good returns, but a part of their returns has been washed away by their high expense ratio.

For instance, Birla Sun Life Advantage Fund, which is one of the costliest and was launched in February 1995, has given a return of 19% beating its benchmark, BSE Sensex, by a margin of 8%. Reliance Growth, launched in October 1995 (seven months later), has given a return of 28% beating its benchmark, BSE 100, by a huge 16%. Was it the pure stock-picking skill of Reliance? Maybe. But the fact is the Birla Fund has an expense ratio of 2.31% and Reliance Growth Fund has an expense ratio of just 1.79%.

Conclusion

High expense ratio will hurt you in long run, so incase you are choosing two similar looking and similar performing financial products, you should look at their cost structure.

Can you share what you took from this article and how you will apply in your financial life?

Subscribe via RSS or Email:
What do you want to read about
Mutual Funds Life Insurance BankingHealth Insurance Credit Report and ScoreMost Commented ArticleReal Life Experiences Share MarketLoans Real Estate Income TaxCredit Cards For Begineer Investors Succession Laws EPF ULIP Product ReviewsBest of Jagoinvestor Other Products & Concepts How-TO GuidesBooks, Launches, Initiatives Investors Myths Psychology & Wisdom PPF General

{ 119 comments… read them below or add one }

1 Santy July 4, 2011 at 1:30 pm

Everyone wants a free meal… But the truth is there is no free meal.

Why does the Cadbury and Nestle have a different price for their products? Bcoz it depends on their strategy, their offerings and most important of all their TARGET market. Just because an expense ratio is 2.5% doesn’t mean the fund manager is looting you or 1% means that he is god.
He has a price for his product and if you like the product at that price buy it. But to take expense ratio as the input for choosing the fund will be stupidity.

Reply

2 Manish Chauhan July 4, 2011 at 4:53 pm

Santy

I get your point to some extent . but you will agree that atleast passsive funds like ETF’s or index funds dont have much expertise required from fund manager, in that case atleast it makes sense to look at Expenese ratio ?

Manish

Reply

3 Deepak R Khemani July 4, 2011 at 7:56 pm

Well Manish what you need to do is check up all the index funds from all AMC’s and you will find a wide variation in their performance. Their are some real laggards, even though they are passive funds and because of their passive nature they charge lesser fees but if you have a laggard index fund with minimum charges what is the point, if an index fund cannot keep up with the index there is no point being invested in it. We have to learn to pay for performance(or out performance?). Don’t our Financial Planners charge fees from their clients? and everybody charges differently!
Do an article on passive funds and their performance.

Reply

4 Manish Chauhan July 5, 2011 at 1:19 am

Deepak

Agreed , Looks like you didnt take my message . It first aim is to make you guys understand the concept of expense ration and tell that a fund with equal capability can lead to different final returns based on their expense ratio :)

Manish

Reply

5 Joel June 29, 2012 at 1:37 pm

Yeah their is no free lunch. Its the part of the deduction expenses.Its validate according to AS. I guess its fair

Reply

6 Puneet July 4, 2011 at 1:51 pm

It makes sense to look at expense ratio if you are comparing index funds. btw, do we have any index funds? Probaly not or very few becase they are expected to have *low* expense ratios…
Do you see what I’m pointing to?

Reply

7 Puneet July 4, 2011 at 1:53 pm

And probably this is the reason direct Equity is the way to go … anyways it’s all long term you see so you’ll save on : Fund house risk, Fund manager risk, expense ratio, fund merger crap etc etc..

Reply

8 Manish Chauhan July 4, 2011 at 4:48 pm

Puneet

The only issue there is the tracking part , the upside and downside becomes critical in case of direct equity .

Manish

Reply

9 Manish Chauhan July 4, 2011 at 4:49 pm

Puneet

yea you are saying that companies create active funds , so that they get a chance to charge more ? Hmm .. I partially agree . not sure why :)

Manish

Reply

10 Srikanth July 4, 2011 at 2:04 pm

Manish,

The way the maximum is set for equity funds depends on the corpus they manage. SEBI has the following slabs for calculating expense ratio:

Equity: 2.5% upto 100 crore, 2.25 for next 300 cr, 2.0 for next 300 cr, and 1.75 for rest

Debt: 2.25% upto 100 crore, 2.0 for next 300, 1.75 for next 300 and 1.5 for rest

Index (Passively managed funds, including ETFs): 1.5%

This is the reason one sees larger, older funds have lesser expense ratio than newer, smaller funds. Generally, AMCs charge as much expense ratio as is allowed by this slab. For funds like HDFC Equity with a massive corpus, the ratio will tend towards 1.75% than the rest purely due to size.

One big and telling exception is Quantum, which is a small fund that has a low expense ratio – lower than any other fund in the market.

Another important thing:

Due to this slab method, expense ratio of a fund is not a static number year over year. As the fund grows, the expense will come down, as you can see. So, to choose between two funds based purely on TODAY’s expense ratio for a 10-15 year investment would not be right.

In my opinion, expense ratio comparisons are more valid commoditized instruments such as gold funds or passively managed funds.

thanks,

Srikanth
FundsIndia.com

Reply

11 Arudra Kumar July 4, 2011 at 3:32 pm

@ Srikanth,

Nice explanation. thanks!

Regards,
Arudra.

Reply

12 Manish Chauhan July 4, 2011 at 4:47 pm

Srikanth

Yup , I knew this, the main idea of the post was to highlight how it works and how two funds with same “attributes” over long term can give different returns . But i understand and agree to your points . When we get 20-22% kind of CAGR return , we can probably give looking at expense ratio a miss .

Manish

Reply

13 Rakesh July 4, 2011 at 9:04 pm

Srikanth,

Very good explanation.

Rakesh

Reply

14 vipul July 8, 2011 at 6:20 pm

@ Srikant
Thank you for your clearing misconception about expense ratio. It will help ignorent investors to understand that expense ratio is not a thief that steals away long term gains.Funds are not selected using just one or two criteria. One must have skills to understand which combination will help him to select the best suitable fund as per his requirement.
Vipul

Reply

15 Chander Kant Goyal February 11, 2012 at 7:32 pm

The main reason for quantum to maintain low expense ratio is abolishing trail commissions, In my belief its really unethical structure to pay for financial advising services, payments should always be made by consumer of the financial products , not by providers by making a hole in consumers pocket
I really appreciates steps taken by Quantum to come with such bold stratergy
But unfortunately the current structure of most of the funds creates the conflict of interests in services provided by all financial advising agencies and results in meager services to the customers.

I hope regulators understand the need of the hour very soon and take a leap in abolishing indirect payments to agents as many mature economy has now done, the industry can flourish only then with truly awake customers ‘Jage-Investors”

Reply

16 Shinu July 4, 2011 at 2:36 pm

Dear Manish

I dont think we can zero-in on any fund for investing based on its expence ratio at all. yes it is eating up from the returns which is based on the SEBI guidelines.

Frankly i am ready to give 20% of the profits made above the catogory average or 10% of the profits made above the benchmark provided a guarenteed benchmark return for a minimum lock in period…. :).

Pay peanuts and get peanuts, but pay gold and you should get back gold too.

Regards

Shinu

Reply

17 Manish Chauhan July 4, 2011 at 4:38 pm

Shinu

Agree with you , the whole idea is , if I see two funds A and B and they are similar in performance and suits me , I would choose with the fund having less expense ratio considering I am investing for long term, it will help me in long run

Manish

Reply

18 Gopi July 4, 2011 at 2:38 pm

NAV Published daily is inclusive of expense ratio or Exclusive of Expensive.

Reply

19 Manish Chauhan July 6, 2011 at 10:25 am

Gopi its inclusive of expense ratio , I mean expense ratio is deducted and then NAV is published

Manish

Reply

20 ananda July 4, 2011 at 3:05 pm

Its really nice article as it will help us in doing wise investment.
Also, the above example u have show is for “ONE TIME” investment.
If i a SIP on monthly basis, will the expense ration be high or same as “ONE TIME” investment

Reply

21 Manish Chauhan July 6, 2011 at 10:26 am

Ananda

Understand that the expense ratio as a number is fixed , so each day its calculated , what matters is what was your AUM , not how you are investing .

Manish

Reply

22 Saurav Sinha July 4, 2011 at 3:13 pm

Excellent article as usual Manish …. where can we get the expense ratios of all MFs?? I cudnt find it in valueresearchonline.com….

Reply

23 Manish Chauhan July 4, 2011 at 4:32 pm
24 Saurav Sinha July 4, 2011 at 3:19 pm

Moreover… the return value we put in Constant SIP calculator is CAGR or Absolute or Year on Year return??? I got confused ….

Reply

25 Manish Chauhan July 4, 2011 at 4:30 pm

Saurav

Its CAGR

Reply

26 S S July 4, 2011 at 3:27 pm

Thats one of the points I look in to when selecting a MF. Infact I was very much impressed by CR equity tax saver but having a tough time decide which one to finalize: CR or HDFC. Finally I decided to go with HDFC taxsaver. The difference in expense ratio is too high for long run.

Reply

27 Manish Chauhan July 4, 2011 at 4:29 pm

SS

HDFC Taxer on obsolute level also looks like a better fund , atleast a long term winner :)

Manish

Reply

28 raju July 4, 2011 at 3:37 pm

Manish,

Once again a good article with a great effort and research.
I have always one doubt at the expense ratios/charges that how transperant are those?Are the investers revealed about the where the AMCs are spending and how?
Is SEBI taking care of the transperansy?

Regards,
Raju

Reply

29 Manish Chauhan July 4, 2011 at 4:28 pm

Raju

Its not publicly available, but I suppose that each MF has to report it to SEBI . So I dont doubt them for transparancy

Manish

Reply

30 Gopi July 4, 2011 at 5:03 pm

Manish

Reply

31 Gopi July 4, 2011 at 5:04 pm

Manish

Could you please tell me NAV Published daily is inclusive of expense ratio or Exclusive of expense ratio ?

Reply

32 Manish Chauhan July 4, 2011 at 5:27 pm

Its excluding the expense ratio . I mean first expensea ratio is cut , and then NAV is published

Manish

Reply

33 Sanjay July 4, 2011 at 7:46 pm

First take asset diversification call. Where do you think equity is headed in next decade? then decide in which mutual fund to invest…..
you have to see macro picture first….rest of the details does not impact much.

Reply

34 Manish Chauhan July 5, 2011 at 1:20 am

Sanjay

Good pointers . the articles aims to communicate the idea of the expense and its impact , not how to choose the long term investments .

Manish

Reply

35 Shiva July 7, 2011 at 4:04 pm

How to identify the next decade direction of equity?

Reply

36 Manish Chauhan February 14, 2014 at 8:42 pm

You cant !

Reply

37 Ujjwal July 4, 2011 at 8:20 pm

Manish,

Nice analysis. For me it shows the difference that a small change in the rate of return make over a very long period. For a 30 year duration the difference between 1 return of 12 % ( no expense) and 10% ( with 2 % expense ratio) is 30lacs vs 16 Lacs. How do I get a better return in a very long duration? I need to invest in equity or real estate.

Also, since the overall performance of a mutual fund has already factored in the expense ratio I’ll look at the 5,7 and 10 year return of a fund when selecting the fund in a category to create my portfolio.

However, as always I learnt today about the Sebi norm about expense ratios based on the size. It makes sense and it favours the old established funds with large corpus.

Ujjwal

Reply

38 Manish Chauhan July 5, 2011 at 1:17 am

Ujjwal

yea .. you should look at 3,5,10 yrs return to see the consistency of the funds return , but some eye on managemement and its allocation should also be looked upon ,. Historial data can not predict the future movement :)

Manish

Reply

39 Phani February 14, 2014 at 6:54 pm

Manish / Ujjwal,
Correct me if I am wrong.
In the direct fund, only a part of the expense ratio is reduced and not the complete 2% odd. Hence the difference between the direct and non-direct fund will not be in the 45% range in a 30 year long investment.

Reply

40 Manish Chauhan February 14, 2014 at 8:44 pm

Yes a small part , so it can be close to 50% of the original one . it can really make a huge difference over 30 yrs . If not 45% , then atleast 30% .. which is quite big !

Reply

41 breeze July 4, 2011 at 8:44 pm

Thank you for writing this article. I just have one quesiton.

What if I incur a loss? e.g I invested 100, 000 and NAV went down by -o.5% in a day. How expenses would be calculated before NAV gets published?

Reply

42 Manish Chauhan July 4, 2011 at 8:56 pm

Breeze , it would be same thing for you . the expense ratio is calculated on your worth at any point , so it would same in profit and loss case

Manish

Reply

43 Rakesh July 4, 2011 at 9:07 pm

Manish,

Excellent analysis, great job.
I was very surprised to see the figures over the long term, how the expense ration can take a hit on my funds. I am investing for a very long term and I am happy as long as my funds generate @ 15% per year.

Rakesh

Reply

44 Manish Chauhan July 5, 2011 at 1:15 am

Rakesh

Yea . Many people dont understand its implications . 15% return in long run is something which can be good enough even if there are some high expense ratio :)

Manish

Reply

45 Shiraj July 5, 2011 at 12:49 am

Isnt expense ratio is a function of AUM of a scheme. Higher AUM->Lower Expense and vice versa. Also one needs to know that Expense ratio will be there for all the good reasons, else how will a AMC earn. The average expense ratio of a equity scheme usually is in the range of 0.85% – 0.9%. Incidently, your article only suggests that one should not stay long term in equity funds.

Reply

46 Manish Chauhan July 5, 2011 at 1:14 am

Shiraj

Can you give me some funds with such a low expenses which are pure equity funds (not ETF’s) with such low expenses ?

Manish

Reply

47 Rajesh July 5, 2011 at 1:02 am

Hi Manish,
Excellent article on expense ratio – Thank you. Also thanks to Srikanth for his input & explanation.
rd,
Rajesh

Reply

48 Manish Chauhan July 5, 2011 at 1:13 am

Rajesh

Thanks , Did you knew that expense ratio has such an impact on your returns ? Forward it to your friends as well .

Manish

Reply

49 Rajesh July 5, 2011 at 2:08 pm

Sure will pass on to all my friends.

rd,

Rajesh

Reply

50 Milind Kotibhaskar July 5, 2011 at 8:29 am

Manish,
That was an interesting article. I have never given a thought on this aspect of the Mutual fund. Since I invest for a longer period ( > 5 years ) I need to see this also while choosing an MF.

Reply

51 Manish Chauhan July 6, 2011 at 10:24 am

Milind

Ya , also see that you are looking at expense ratio if you are a long term investor like 5-10 yrs ? Are you sure you want to invest for so long ?

Manish

Reply

52 Padmanaban July 5, 2011 at 9:37 am

Dear Manish,

Compared to all other investment vehicle mutual fund costs are far

cheaper. More importantly, people who lost money in MF is very

less compared to any other investment vehicle. MF penetration is very less

and it is a single digit thats what every articles data conforms.

Considering the above facts, let us first penetrate the mutual

fund market at least to double digit then we talk about who is

charging more and who is charging less.

The so called investor is already confused with so many websites,

magazines and newspaper on top of it ET Wealth is giving more

inputs on a weekly basis. If they read all then the probability of

coming into MF industry itself is less. They will always chase winners and winners rotate!

To my surprise no industry is talking about their pricing and who

is cheap or who is costly whether it is insurance, real estate, or

broking company, even bank charges are vastly varying.

Hence, I would request you to throw more insights on concepts rather than talking about how it operates.

Regards
Padmanaban

Reply

53 Manish Chauhan July 5, 2011 at 9:51 am

Padmanaban

Mutual funds penetration is low , agreed . But even this is a concept and its important for one to understand how things works out. I dont see any other commentator who has not welcomed it . They are all wanted to know these kind of information , why do you feel that this kind of info would discourage one to invest ?

Manish

Reply

54 Padmanaban July 5, 2011 at 10:39 am

Here, I also welcome your comment. But my point is instead of digging how it operates we can suggest some concept. Lets say if somebody is paying 20K as home loan if he increases to 2o% which is another 4k if that is invested in MF it will get back all the money paid towards home loan in 20 years.

I keep wondering when it comes to buy mobile, car, house you name anything they are not worried about the price, infact there the variation is huge. If they could have done the pricing whatever you have mentioned they can earn multifolds.

In my previous comment why other industry is not talking about the pricing? Is it difficult to understand and complex? When other investment vehicles are not talked about this, why should MF industry alone? Already the regulations are very strict. I am looking for the answers.

If you compare IDFC Premier Equity to any other fund it is one of the best fund since it is launched and its expense ratio is 2.5%. More than the expense ratio the performance also matters.

Since you are in the distribution side, let us first penetrate the market then will discuss about the modus operandi of MF industry.

Padmanaban

Reply

55 Padmanaban July 5, 2011 at 10:55 am

To add my previous comment the expense ratio is ranging from 1.78 to 2.5%. The margin is .7%. No fund can work without expense ratio. Index fund has less expense ratio but the returns are far inferier than diversified equity funds return in a long run.

Similarly you talked about losing those percentage, if you compare the similar expense ratio of HDFC Top 200 and Reliance Growth fund both have launched in the same period (roughly 1 year). HDFC has given 24.82% vs Reliance Growth has given 27.41%. The differnce in returns are very huge. HDFC Top 200 has got the highest brand equity than any other fund in MF industry as of now and every investor would like to have one fund in HDFC Top 200 before considering any other fund.

Why some one choose different fund because we don’t know which one do well in a long run, considering this, expense ratio is not the only thing before you consider investing. I do agree that it is important but not must.

The datas were taken from Valueresearch.

I respect your views on this.

Padmanaban

Reply

56 Manish Chauhan July 5, 2011 at 11:18 am

Padmanaban

I am aligned with your thoughts . There is no debate on point that a superior funds should be choosen based on how much its performance is . How ever all i wanted to say was that if you are choosing something and you have two options at the end which are similar in all the aspects , then in order to choose one, one can look at expense ratio as one factor . So we are on the same page .

Manish

Reply

57 Karun Sandha July 6, 2011 at 11:04 pm

Hi

Just a point …… in long run very few diversified mutual funds have managed to beat the benchmark consistently.

At the end of the most efficient barometer is the Index.

Karun

Reply

58 Chander Kant Goyal February 11, 2012 at 7:43 pm

I don’t buy the point that expenses of MF industry should not be discussed for sake of penetration of MFs.

Reply

59 BHARAT SHAH July 5, 2011 at 12:07 pm

THE MOOT POINT OF THE DISCUSSION SEEMS TO ME , AS SHRI SRIKANTHA RIGHTLY POINTED OUT , FOR COMMODITITY ORIENTED M.F. SUCH AS GOLD ETF AND PASSIVE FUNDS SUCH AS INDEX ETF, EXPENSE RATIO IS MUCH MORE IMPORTANT RATHER FOR EQUITY FUNDS, WHERE HISTORY OF RETURN( AFTER EXPENSES) OVER A LONG PERIOD IS AVAILABLE .

Reply

60 Manish Chauhan July 6, 2011 at 10:22 am

Bharat

yes , unless we have historical data , how will we compare funds on basis of expense ratio ?

Manish

Reply

61 Jig July 5, 2011 at 2:45 pm

As per FP all funds need to be review minimum 3 year duration.

Is this matter while choosing expense ratio??

Thanks

Reply

62 Manish Chauhan July 6, 2011 at 10:20 am

Jig

Understand that expense ratio is not the biggest or a big thing. Its can be looked upon as the last thing if only you are not able to choose two funds with equal capacity .

Manish

Reply

63 Nilesh July 5, 2011 at 5:25 pm

Hi Manish

i had been reading abt expense ratio for some time..but did not hv clear picture…thanks to you and this article that came to know abt expense ratio and how it can be one of deciding factors for long term investing.

Rgds

Nilesh

Reply

64 Manish Chauhan July 6, 2011 at 10:19 am

Nilesh

Good to hear that :)

Manish

Reply

65 faisal July 6, 2011 at 4:42 am

Manish,

Whats the difference between Management Fee(%) and Expenses (%).

On ICICI Direct i see these under the “Investment Information” section. Are both of these accounted for while calculating the NAV?

Thanks,
Faisal.

Reply

66 Manish Chauhan July 6, 2011 at 10:10 am

Faisal

Manangement fee is a part of Expense ratio , there are many types of expenses in a mutual fund .

Manish

Reply

67 Suren Babu July 6, 2011 at 6:18 am

This poses a interesting question. Is there any relationship between size of the fund and expense ratio? Pl clarify.

Reply

68 Manish Chauhan July 6, 2011 at 10:08 am

Suren

Yes , as the size of fund increases , the expense ratio should come down and it comes down for many funds .

Reply

69 Paresh July 6, 2011 at 6:11 pm

Dear Manish,
This is a good issue for discussion.

But we should remember one thing that this number is not constant.In future its possible that expense ratio of HDFC Tax saver becomes 2.49% and that of Canara Robeco becomes 1.90. so its not a good idea to select fund based solely on Expense ratio otherwise funds of quantum mutual fund would be always front runner.

Reply

70 Manish Chauhan July 9, 2011 at 6:23 pm

Paresh

Yea .. agree with you .

Manish

Reply

71 Sudhir July 8, 2011 at 8:11 pm

Manish, I have enjoyed reading your articles. Keep up the good work. Regarding this specific article, I have a comment. Your analysis is based on a layman’s view of seeing returns and hence very exaggerated. What actually happens is that expense ratio cuts off your CAGR. Due to compounding the effect of expense ratio leads to more cut than just simple subtraction of expense ratio value. So it is not 12-2 = 10% but less than this. To be exact, at the end of 1 year, your principal P should be 1.12*P but is now 1.12*0.98*P = 1.0976P. The expense ratio of 2% is eating your networth, so 1-0.02=0.98. Therefore, the effective interest rate is 9.76%. If you compound 12% and 9.76% for 30 years, you will get exactly your figures. So my thumb rule has been, for practical range of expense ratio of 1-2.5%, subtract this from CAGR and little bit more around 0.2-0.5%. Lower the expense ratio, lower additional cutoff. You can as well calculate off exactly by what I have shown.

So for me its a nice way to compare with other investments like FD or bonds or PPF etc. Finally this is what is shown in all website. The 100% and 55% seems scary hahahha.

This was just a note. Nevertheless, your articles are simple and clear. Once again, keep up the good work.
Sudhir

Reply

72 Manish Chauhan July 9, 2011 at 5:58 pm

Sudhir

I have taken the CAGR before expense ratio , Agree that there can be some mismatch, but hte idea was to give a overall picture and keep it simple so that people can understand it , didnt wanted to go in deep maths .

Thanks for your correction :)

Manish

Reply

73 Sushil bharti July 9, 2011 at 3:01 pm

Thanks for this eye opening article also tell about there terms alpha ,beta, r squired ,mean ,standard deviation, sharp ratio used for mutual fund thanks

Reply

74 Manish Chauhan July 9, 2011 at 5:43 pm
75 Sandeep July 10, 2011 at 5:10 pm

Hi Manish
Can you please advise how I can find out expense ratio of ICICI Prudential Life Time Super plan?
I have checked on http://www.iciciprulife.com/public/Life-plans/Life-Time-Super.htm and http://www.morningstar.co.in but was not to find it!

Thanks in advance

Reply

76 Manish Chauhan July 18, 2011 at 6:10 pm

Sandeep

See the document which you have got , there will be some thing called as FMC

Manish

Reply

77 Nilesh July 11, 2011 at 1:58 pm

Hi guys, have you checked Money Today’s July issue? It is all about ULIPs and they have given a table of comparision between ULIPs and MF+Term Insurance. To my surprise, the difference between return corpus over 20 years is hanging on the charges e.g expense ration/Fund Management charges. One percent increase in MF charges, makes ULIP investment look better. However they have assumed 10% return for both the investment options over 20years.
So MF+term may score better if look at the actual %return MFs give over long term.

But still article is a good read and tells you the importance of expense ratio.

Reply

78 Paresh July 11, 2011 at 3:22 pm

I think there is growing confusion in investors about expense ratios.

Investors need to understand that Expense ratio in mutual funds is inclusive in daily NAV declared and in ULIPs fund management charges are applied via separately cancellation of units which diminishes the compounding effect for these cancelled units.

Reply

79 Manish Chauhan July 11, 2011 at 8:00 pm

Nilesh

Yea .. exactly my point :)

Manish

Reply

80 Priya July 15, 2011 at 6:30 pm

A very good article yet again..Thanks for this one too :)

Reply

81 SANDEEP SINGH September 25, 2011 at 9:56 pm

dear manish ,
first of all thanks a ton for such a wonderfull article .
one point which i want to know is — if any fund giving me a return of 25%
and 22% , having its expense ratio of 2% and 1.5%. which fund do i keep.
and whether theses fund houses give their return after deducting their charges or later on they use to deduct . need in detail

Reply

82 Manish Chauhan September 29, 2011 at 9:59 am

Sandeep

They give the returns after deducting the expenses .. So if they are saying 25% and 22% , its after expenses ! . So better keep 25% one

Manish

Reply

83 SANDEEP SINGH September 30, 2011 at 1:34 am

THANKS DUDE

Reply

84 ananda October 10, 2011 at 4:21 pm

Is it better to bu e-preferred term or offline preferred term plan from kotak

Reply

85 R SIVA PRASAD December 22, 2011 at 9:59 pm

Sir,
I have read in this website some where, NAV declared by Fund is after deduction of charges. So, there is no need to think of expense ratio, I think.
We consider returns based on NAV.

Please confirm
R Siva Prasad

Reply

86 Manish Chauhan December 23, 2011 at 5:31 pm

R Siva Prasad

Yes .. but you never know about the future performance .. if Fund A has 2% expense and Fund B has 1% expense .. then what about bad performance of A , becasuse even with bad performance you will be cut 2%

Manish

Reply

87 Chander Goyal February 13, 2012 at 3:50 pm

Hi Siva,

I don’t think that becouse of the fact that NAVs are declared after deducting expense ratio daily , makes no difference, Its ultimately being spend from investors money principal money or returns, see the article in economics time how Funds are partying with investors money even during not so good or bad times in market
http://articles.economictimes.indiatimes.com/2011-09-12/news/30145350_1_expense-ratio-equity-funds-reliance-equity

Don’t you think ethically atleast large funds should lower their expenses instead of charging whatever SEBI permits them to charge?

Reply

88 Sidd February 7, 2012 at 6:46 pm

Valuable Article.Thanks. In your first example you are calculating 365th part of 2 % on 100,000- that comes to 5.48. however in table, at any given expense percentage you are calculating value on 112000 (in first row)- that comes to 110880.

if i am correct then plzz let me the know the reason ? or plz rectify if i am making any mistake?

Reply

89 Manish Chauhan February 7, 2012 at 9:11 pm

Sidd

The table shows the yearly calculation as per 12% return, so after calculating the interest , you then calculate expense ratio

Reply

90 Sidd February 8, 2012 at 12:44 am

thanks. Would it be possible for you to tell me how are you getting this value 122944 in second year with 1% expense ?? i am unable to get this value. why there is a difference of 2496 if 1% has to be deducted on 125440. if possible plz explain.

Reply

91 Manish Chauhan February 8, 2012 at 1:28 pm

Sidd

Its =100000*((1+0.12) * (1- 0.01))^2

Because you are getting 12% return and paying 1% back in charges , so 1.12 to the power 2 multiplied by .99 (1% deduction) to power of 2 (for 2 yr)

Think like this , you earn 12% and then on final value you pay 1% , then again you earn 12% and then pay 1% ..

Now this is not exactly how its calculated because the expense ratio is deducted on daily basis , but for ease point of view , we have taken this calculation .

Manish

Reply

92 Chander Goyal February 13, 2012 at 3:26 pm

Its a very insensitive on fund managers side that very large funds like HDFC TOP 200, HDFC Equity are also charging highest possible expense ratio stipulated by SEBI, I know only one fund house which even being very small is delivering good funds at low expense ratios, that is Quantum mutual fund

Reply

93 Manish Chauhan February 13, 2012 at 7:48 pm

Yea quantum is really doing well on that side

Reply

94 Anish February 15, 2012 at 12:02 pm

Hi,

Reading the article above and comments prompted me to go to the HDFC website and download the financial report for HDFC AMC for last year.

Just to add some perspective. HDFC AMC made a PAT of Rs. 242.2 crs in FY 11 and Rs. 208.4 crs in FY 10. This on Income (proxy for sales) of Rs. 681 crs and Rs. 625 crs respectively. Thats a handsome margin of 35.6% in FY 11 and 33.3% in FY 10. The ROE for this business for HDFC is almost a mind boggling 47% in FY 11 and 48% in FY 10. Can i buy this business pls?

Ofcourse for an HDFC, Reliance and Pru we also have so many others like Fidelity which are struggling.

The other point I am trying to make is that is there a place for something like a Vanguard kind of structure in India where the AMC is owned by the mutual funds themselves. The extra-money that is left over after meeting expenses, incentives et al goes back to the MF holders. So the MFs holders themselves benefit. These are Non-profit entities , different from Not-for-profit. Ofcourse what happens if there is a loss. Just a different idea.

Regards
Anish

Reply

95 Manish Chauhan February 15, 2012 at 1:17 pm

Anish

Should you not see the profits (net) in relation to what funds they are managing , that would be more real and better indicator . MF in india are for profit entities

Reply

96 Anish February 15, 2012 at 1:53 pm

Manish,

Thats also a view but then that would be like measuring profits of a co on the assets (Fixed plus Current) in this case the AUM (Assets Under Management). A metric which doesnt really tell us anything. Usually fund houses are valued at a% of their AUM. Measuring profits on AUM is not an indicator of profits as they are not assets in the traditional sense i.e. the fund house doesn’t own the AUM.

We have to look at what the promoter has invested and what they are making out of it i.e. Profits/ (Equity cap plus various reserves) or profit margin.

I know MFs are a for profit entity. But Vanguard is a pioneer and one of the largest fund managers in the world ($1.6 trillion as of last year) and they have non-profit model. The founder John Bogle has a diff take on the for-profit entities.

Anyways anyone who is interested can check this link

http://en.wikipedia.org/wiki/The_Vanguard_Group

Regards
Anish

Reply

97 Chander Goyal February 15, 2012 at 7:32 pm

Agree 100%,

concrete changes are required in the way Mutul Funds are managed in India,
SEBI’s stipulated charges are only maximum charges funds can charge but funds should lower the actual charges by reducing costs and taking only sensible returns, I heard SEBI was going to tighten the rules slowly by expanding the slab in expense ratio structure and there should be strict auditing of the expenses being deducted on base of expense ratios

Reply

98 Aseef February 22, 2012 at 10:21 pm

hello manish.
Its a great article and the discussions are even better.
Well, i have a basic question.how is this exp.ratio levied from the investor.should he actually pay it or is it deducted from the asset worth?

Reply

99 Manish Chauhan February 23, 2012 at 1:34 pm

Aseef

Its deducted from the fund each day . So you pay 1/365th of expense ratio each day and then NAV is published.

Reply

100 vignesh February 24, 2012 at 7:08 pm

Hi manish

I am a regular reader of your blogs. for the past six months. Whenever i am free i will come to your website and read the old articles written by you.

At that time i came to see this article.

I have one doubt.

In case market is down . will they deduct expense ratio?

Regards
Vignesh

Reply

101 Manish Chauhan February 24, 2012 at 7:46 pm

Vignesh

Yes , expense ratio is the charge for managing the mutual funds, markets position does not matter .

Manish

Reply

102 puneinvest March 25, 2012 at 11:09 pm

It’s simple If Loss making company told their employee this year not pay you salary, Next year pay you salary If company get good profit.

It’s a possible, No
Same thing to calculate expense ratio

If expense ratio reduce or cut then no way to do business for Fund house.
No expense ratio = No Fund House
means No Mutual Fund Industry

Reply

103 aseef February 26, 2012 at 6:10 pm

hello manish,
I was checking two mid/small cap finds….icici prud.discovery and tata div. yield and they have exp.ratio pf 1.00 and 2.36!
Why so much of a difference when the former perform slightly better?

Reply

104 Manish Chauhan February 28, 2012 at 10:42 am

Aseef

Thats totally dependent on them and it depends a lot on the assets managed !

Reply

105 dhanasekar May 3, 2012 at 4:24 pm

Hi ..I want to clarify about a scheme. Is there any scheme named ” canara bank robecco equity saver” ?
Does that scheme contains the following features ?
One of my friend invested in this scheme on 2009 for 3 years with one time investment 25000 Rs . Then he was getting dividend 4000 Rs every 4 months once ..for 3 consecutive years. Recently he finished that scheme and got 39000 Rs lump amount as market value of 25000 Rs .
So he totally got 4000*3=12000 Rs (each year)
For 3 years 36000 Rs .(DIVIDEND FOR EVERY 4 MONTHS )
On finishing the scheme 39000 Rs .(MARKET VALUE OF 25000)
Totally he got 75000 Rs by simply investing 25000 Rs 3 years before .
With this credentials any schemes available in robecco.. please inform me ..

Reply

106 Manish Chauhan May 3, 2012 at 7:12 pm
107 Joel Vaz February 18, 2013 at 7:02 pm

Hi Manish,

It was an excellent article and a real eye-opener for people who often get misled about which fund has given more returns, regardless of the charges that will reduce the final returns of the funds. I believe people should be given knowledge on the fund charges and how it would impact their final return, rather than trying to sell the product to people who are less literate about such minor details.

One question from me: I am looking forward to invest in Gold (Pure Investment). And I plan to invest in Quantum Gold Saving Fund (0.25% — Expense Ratio). My time horizon is 12 to 18 months. What is your advice/take on it ?

Thanks,

Joel Vaz

Reply

108 Manish Chauhan February 21, 2013 at 10:17 am

Go ahead .. Gold ETF is also an option if you have a demat !

Reply

109 roshni June 23, 2013 at 7:06 pm

thanks for the article.

I’m new to investing. And I concluded from your article and all comments that I should invest in large and old funds (cod they have lower expense ratios) and for not more than 5-6 years (ofcourse also looking at the returns). Am I on the rite track? :D

btw this also cleared a doubt about why AMC’s create identical funds with a different name eg. SBI pharma and SBI pharma growth have same portfolio allocation, same benchmark, same fund manager only inception date is different !!

Reply

110 Roshni June 23, 2013 at 7:14 pm

Thanks for the article.

I’m new to investing. And I concluded from your article and all comments that I should invest in large and old funds (cos they have lower expense ratios) and for not more than 5-6 years (ofcourse after looking at the returns). Am I on the rite track? :D

btw this also cleared a doubt about why AMC’s create identical funds with a different name eg. SBI pharma and SBI pharma growth have same portfolio allocation, same benchmark, same fund manager etc only inception date is different !!

Reply

111 Manish Chauhan July 1, 2013 at 5:12 pm

They are not different funds, they are same .. in general there are GROWTH and DIVIDEND option !

Reply

112 Roshni July 1, 2013 at 6:40 pm

I meant SBI pharma fund (Growth) and SBI pharma fund – direct plan (Growth). Like that even Reliance and UTi has 2 each of their pharma funds. The only difference was the inception date rest everything being identical.

I checked on
http://www.morningstar.in/tools/mutual-fund-performance-comparison.aspx

Reply

113 Roshni July 1, 2013 at 8:57 pm

it is sbi pharma fund and sbi pharma fund – direct. even reliance and uti have 2 funds each with same criteria i.e. all things being identical only inception date is different.

i had checked on morningstar.in

sbi pharma fund – growth was a typo. :)

Reply

114 chary February 3, 2014 at 5:45 pm

Hi

Really a informative article on expense ratio. I have following question
1. If investor choose low expense ratio then performance of portfolio will be lower as compered with high expense ratio’s funds? is I am correct? can you you please give your opinion/suggestion?

regards
chary

Reply

115 Manish Chauhan February 3, 2014 at 5:47 pm

Its not neccessary, each fund is different and their performance will depend on their fund managers ability , not expense ratio !

Reply

116 chary February 4, 2014 at 10:44 am

Thanks for your prompt reply. That means for both regular and direct fund will be managing by fund manager, for which every investors in MF required to pay expense for fund management. Now, doubt arise is why should we pay agent/intermediator charges in case of regular plan in addition to expenses amount as fund manger for both plans manged by same person? Is this right? please correct it if my understanding is wrong.

Reply

117 Manish Chauhan February 14, 2014 at 8:40 pm

Yes your understanding is correct, if you can still pay to agent, if he is helping you with the overall decision making and if you feel that his inputs adds value to your financial life.

Reply

118 A S Mohamed Rafi August 15, 2014 at 1:06 am

I am new to the mutual fund and have question regarding Mutual fund.

1. Mutual funds is interest based investment?

2. If am investing in the mutual funds, is any mutual fund company or any stocks in that funds providing / adding any interest to that fund to raise the investment value. Please let me know with details?

Thank you !

Mohamed Rafi

Reply

119 Manish Chauhan September 20, 2014 at 5:35 pm

1. NO , its not interest based

2. No idea what you mean by that

Reply

Leave a Comment