The function
of a mutual fund (MF) is to collect money from different investors, research on
quality securities such as equity shares; bonds etc. and employ investors’
money in them to give good returns over time.
Expense
Ratio..
To do this
function every mutual fund levies a charge on MF schemes, which is ultimately
beared by the investor, known in industry
jargon as Expense Ratio.
Not many
investors seem to be aware of the existence of such a charge as it does not
appear on account statements or transaction statements but is mentioned in the
offer documents and the website of the Fund. Nevertheless the fact remains –
there are no free lunches!
What is
expense ratio?
MFs are not
like banks, which earn their profits & deduct expenses from interest spread
- which is the difference in interest they earn on loans & what they pay on your deposit. Mutual funds
deduct their expenses from the assets of the fund.
Daily NAV
(Net Asset Value) of funds is calculated after deducting expenses. Thus,
expense ratio is accounted for in the NAV of a fund. This is why often it does
not come to our notice.
The expense
ratio deduction happens daily. However, depending on the type of the scheme and
AUM (Asset Under Management) , the expense ratio varies. Generally, the expense
ratio of an equity scheme is greater than a debt scheme.
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