Page 43 - Banking Finance April 2025

ARTICLE

Let's consider two funds, Fund A with an expense ratio of platforms provide information on gross and net expense
0.5% and Fund B with an expense ratio of 1.5%. If an ratios.
investor puts Rs. 10,00,000 in both funds, assuming an
2. Read the Scheme Information Document (SID): This
annual return of 10% before expenses, here's what the
document outlines the expense structure and any
corpus would look like after 20 years: changes over time.
Fund A (0.5% Expense Ratio): ~Rs. 58.4 lakhs
3. Compare with Peers: Check how the fund's expense
Fund B (1.5% Expense Ratio): ~Rs. 48.1 lakhs
ratio compares to others in the same category.
4. Assess in Context: Don't evaluate expense ratios in
That's a difference of over Rs. 10 lakhs purely due to a 1%
isolation. Consider them alongside returns, volatility, and
difference in the expense ratio.
consistency.
Expense Ratios in Different Fund Types
Strategies to Minimize Investment Costs
Actively Managed Funds: These funds generally have
Choose Direct Plans: Always opt for direct plans unless
higher expense ratios because fund managers actively
you need an advisor.
make investment decisions. The ratio can range from
1% to 2.5%. Go Passive: Index funds and ETFs are ideal for cost-
conscious long-term investors.
Index Funds: Since these track market indices passively,
their expense ratios are much lower-typically between Review Regularly: Monitor your investments and switch
0.1% to 0.5%. to lower-cost options when possible.
Exchange-Traded Funds (ETFs): Similar to index funds Avoid Frequent Trading: Reducing turnover also
in terms of cost structure but may include brokerage minimizes transaction and tax costs.
fees.
Regulatory Perspective
Direct Plans vs. Regular Plans: Direct mutual fund plans
have lower expense ratios since they exclude distributor The Securities and Exchange Board of India (SEBI) regulates
commissions. Regular plans, on the other hand, include expense ratios to protect investor interests. In 2018, SEBI
these fees, resulting in higher expense ratios. revised the Total Expense Ratio (TER) structure to bring
transparency and ensure fair pricing across different
Why Expense Ratios Matter More for schemes and fund houses. These regulations limit the
maximum expense ratio fund managers can charge and
Long-Term Investors mandate clear disclosures to investors.
Long-term investing hinges on the power of compounding.
Every rupee that goes into expenses is a rupee that doesn't Conclusion
compound. High expense ratios may seem minor on an Expense ratios, though often overlooked, play a crucial role
annual basis, but over 10, 20, or 30 years, they can in shaping your investment outcomes. A seemingly small
significantly erode your returns. percentage difference can translate into lakhs of rupees
over the long term. For investors, especially those with a
Moreover, in actively managed funds, high expense ratios
long-term horizon, keeping investment costs low is one of
are only justified if the fund consistently outperforms the
the most effective ways to enhance net returns. By
benchmark after costs. Otherwise, investors are better off
understanding how expense ratios work, comparing them
in low-cost index funds.
across funds, and making conscious investment choices,
individuals can significantly improve their wealth-building
How to Evaluate and Compare Expense journey. In the world of investing, it's not just about what
Ratios you earn-it's also about what you keep.

1. Use Financial Platforms: Most online investment -Banking Finance Research Team

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