April 12, 2014 9:56 pm
How important are Expenses ratio and turnover ratio in selecting any mutual funds.
Dear Dhiman, yes, you are correct. So I hope, now you do have the answers to your basic queries.
Dear Dhiman, let me try to help you.
Expense ratio – Imagine there are 2 funds, A and B. Both are investing in same set of stocks with same %age holding. A is charging 1.5% fee as fund management and other charges. B is charging 2.5%. This fee is called Expense Ratio. Now from the above info, please do tell ne at the end of your investing term say 15-20-30 years, where your returns ‘ll be higher and where it ‘ll be lower? also tell me why?
Turn Over Ratio – On last day of the month the fund was invested in some 50 stocks. Now within the next 1 month, the fund manager, exited few stocks, purchased few new one, keep some old as it is, add some old. Now on the last day of the next months, the portfolio of the fund may have 45 stocks, 50 or 55. More than that, the whole composition may be almost same or few changes or drastic changes are there. Thsi change in stock holdings is called turn over ratio. If the core portfolio is shuffeled too much, it indicates that fund manager is trying to trade in stocks and not interested in long term wealth creation. Please do remember, frequent churning of portfolio ‘ll also result in increased expenses on account of sell and buy orders for the stocks, towards, brok, STT and other charges.
Thanks for your reply…from above …Fund A will give higher earning in long run than Fund B ,as deduction from investment in case of fund A will be less than fund B.. hope i was able to give you answer.Thanks
Just love the way you respond to the queries here Ashal!!
Remind me of 1 of our Proffesor during our college days- He used to explain everything, without ever spoon feeding us. Result: We now use our mind more proactively to find a solution!!
Dear Abhinav, thanks for loving me and my counter queries. I’m glad that people are liking my way of answering.
The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.
Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund’s average net assets, is accrued on a daily basis.
This is a measure of the fund’s trading activity, which is computed by taking the lesser of purchases or sales (excluding all securities with maturities of less than one year) and dividing by average monthly net assets.
A low turnover figure (20% to 30%) would indicate a buy-and-hold strategy. High turnover (more than 100%) would indicate an investment strategy involving considerable buying and selling of securities.
Dear Dhiman, in all probability the answer given by you is some Copy Paste work. So I want to understand from you in simple language what these 2 ratios are meant for.
Yes ashal you are right it is copy paste.Actually iam just into Mutual Funds and planning to build Portfolio.Till date i was not aware about the above ratio,but someone just mentioned them to me and i got very curious to know about it from people who know inside- outside about funds.Like there are two funds A and B.Fund A is performing better than Fund B.But Exp ratio of B<A,so the return of Fund B is more than fund A …if we see long term investment.To be very frank till date i never knew about the ratio.It was just for my knowledge from learned people to get feel of it.
Dear Dhiman, what is expense Ratio and turn over ratio? Please explain.
The expense ratio of regular plans are typically in range of 1.8-2.25
While the expense ratio of direct plan are in range of 0.25-1.5
So, as you can see these ratios matter only if you are looking at it from 15-20 years perspective.
If your goal is 10 years down and you need to select balanced fund then, it may make sense to go with good advisor’s fund selection and paying extra in terms of expense ratio. Many times, good advice is priceless.
Note: I am not a distributer.
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