Since expense
ratio is a charge deducted from assets, it is implied that higher the expense
ratio, lower your returns.
Also longer
your investment period, higher is the impact of expense ratio on your returns.
This fact is demonstrated in the illustration below.
Table used
above is for illustrative purpose only.
In the above
example, the difference between the expense ratios of the 3 funds is probably
because of the higher commissions, management fees, marketing budget etc paid
by the
Fund B and
Fund C. It is like losing Rs 1.68 lakhs over 20 years, i.e. about Rs. 8,000
annually.
Expense ratio
of direct plan funds are lower compared to regular plans since the former is
bought directly from the AMC (Asset Management Company).
Difference in
return gets magnified with a higher investment period so it would be prudent to
pay attention to what your fund’s expense ratio is, especially as a long term
investor. It is unwise to ignore the Expense ratio before investing in mutual
funds as it would certainly be useful in choosing between funds of the same
category when the performance of both funds is on par.
Know
Fund’s Expense Ratio
As with other
relevant data, current expense ratio would be disclosed on the website of the
mutual fund.
If you are
unable to locate expense ratio on the website of the fund, you can find it on
various mutual fund research sites Or / you can simply ask the fund house’s
investor service desk.
Remember –
the lower the expense ratio the better for the long term investor.
Therefore,
while investing in a MF is definitely not a humongous task, it is important to
take note of small things like the expense ratio before you park your hard
earned money with them.
Remember, you
should consult your financial advisor in case if you need any guidance
regarding your financial investments.
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