Expense ratio can be defined as the cost incurred to manage the fund. The investors pay a part of money annually to manage their fund. It covers the expenses related to buying and selling of stocks, registrar fees, agent commissions, fund management fee and promotional and selling expenses. It is calculated on the total assets of the fund and, therefore, NAV is measured after deducting the charges.
The importance of the expense ratio varies according to the type of fund people invest in. There is no fixed expense ratio for all the funds. However, SEBI has decided a maximum limit under which equity funds can have maximum 2.5% of expense ratio while the figure in the case of debt fund is 2.25% of the average weekly net assets.
Expense ratio is secondary
Most of the equity funds have an expense ratio of between 2.2% -2.5%. If the equity funds have given a return of almost 20% in the last ten years, the expense ratio will not have an impact on the returns. It even stands true for the actively managed equity funds. The investment strategies followed while the course of investment is the primary factor affecting the returns.
The fact is if the portfolios and funds are handled well, they can provide enough returns to compensate for higher costs in management of funds. It is clearly seen in Birla Sun Life Top 100 fund which has an expense ratio of 2.8%, still it is one of the most preferred funds in the equity segment. Therefore, it is important to select equity funds based on their performance.
Expense ratio matters in debt fund
Expense ratio holds importance in the case of debt fund returns. The concept is simple, returns. The debt funds do not result in high returns, and therefore they can afford to have high expense ratio. Even for passive funds, it is important to take a note of expense ratio.