6 Components You Need To Know About Expense Ratio in Mutual Fund
Nothing in this world is free and for every service that you avail, there is always an additional charge, both directly or indirectly, which is either paid by you or deducted from your profits. The popularity of mutual fund investment is very high as the awareness and importance of savings and investing in the future is more than ever today, especially since the unexpected spread of the global pandemic.
However, even though the number of people investing in mutual funds is increasing, a very small percentage of the population is aware of the expense ratio in a mutual fund. Did you know that mutual fund investment is also a service and so as a service charge, an expense ratio is levied on the investor for the fund management service that is being provided? To understand all about the expense ratio in a mutual fund, let us discuss it in detail below.
Fund Management Charge
The first and the most important fact about the expense ratio in a mutual fund is that it is a fund management charge that is taken by the mutual fund provider, like a bank for example. This charge is taken as a potential management fee of the fund that you invest in on your behalf.
Regulated By SEBI
The percentage deduction of expense ratio mutual fund is directly regulated and controlled by the SEBI. The main two aspects that SEBI looks into, to declare the expense ratio percent is firstly the category of funds along with the maximum charge possible and secondly the value of assets under the portfolio. According to research, the majority of the funds can’t charge you better than the maximum expense ratio percent.
The expense ratio in a mutual fund is not an individual charge as it is made up of a list of different subcategories or sub charges. Some of them include marketing fees, administrative charges, management costs, record-keeping fees, compliance charges, etc. All these subcategories define a separate potential operating expense for the mutual fund provider and so the sum of these is the total expense ratio in a mutual fund.
Dependency On Type Of Mutual Fund
Another lesser-known fact about the expense ratio in the mutual fund is the type of mutual fund you invest in. There are two types of common mutual funds that people invest in, and they are called direct and regular mutual fund plans. When you invest in a regular plan, you seek advice from a distributor and so a part of the expense ratio in the mutual fund is paid to him/her. On the other hand, when you invest in a direct plan, there is no middle person involved and so no additional fee or division of expense ratio takes place.
Charges Are Implicit
As opposed to a regular bank and other charges, in terms of investment, that are evident or explicit, the expense ratio in a mutual fund is an implicit charge that is directly taken from the amount earned by the investor before the final return amount calculation. It is not directly announced as an expense ratio charge in a mutual fund, however, the deduction is small, making it not noticeable at times, especially for investors with big portfolios.
Not A Fixed Percentage
People who are well aware of the relevance and application of expense ratio in mutual funds sometimes tend to believe that the percentage of expense ratio that is deducted as operating expenses remains constant throughout. However, this is a common misconception as the percentage of expense ratio depends on the actual charges that are incurred by the mutual fund provider over a dedicated time.
Overall, the importance of expense ratio mutual fund is very high as it aids multiple decisions revolving around mutual fund investment. Always understand the expense ratio percent for any mutual fund investment before making the final decision.