Low Expense Ratio, High Impact on Mutual Fund Investments

Yes, Mutual Funds, in our view, are by far one of the smartest ways of investments available today. Liquid funds are your parking lots for that contingency funds (aka Emergency fund – this could be your income of 4-6 months), multi asset funds are those multi-talented funds that work as a great diversification tool when you want the best of all three asset classes – Equity, Debt and Gold. Then comes the turn to introduce you to one of the very popular investment avenues in mutual funds – Diversified Equity Mutual Funds.

These are like your best friend – with you for the long-term. As a disciplined investor you should link your investments to equity mutual funds with your long-term financial goals. However, there are over 400 equity mutual funds in India today. Which one do you choose? The one from the most “famous” fund house? Or the one which your friend has invested in? Or the one that has top ratings?

For starters, let us tell you that doing some homework before investing your money is necessary.

Things you must look at before investing are identifying your investment goals and objectives of that fund and checking if it matches your risk tolerance. The lower the better and last but not the least is the expense ratio of the fund.

The expense ratio of a fund is by far one of the most ignored and tiny “looking” number. Those 2.5, 2.3, 1.8 types that are mentioned with other important fund details, but you think to yourself – how much can this “small” number affect your large investments??

Reality Check – they do affect your investment a lot!

We, as investors, often tend to underestimate the impact of this ratio on your mutual fund portfolio.

So, what is Expense Ratio?

Expense ratio is a measure of what it costs an investment company to operate a mutual fund. This is expressed as a ratio of your overall investments with the fund. The largest component of the expense ratio is the fees paid for managing your money. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 percent, then you are paying the fund Rs 150 per year to manage your money.

Every fund house charges different expense ratios for different schemes. Regardless of the scheme performance, the fund house charges you that expense ratio. Therefore, it makes complete sense to go for funds with lower expense ratios.

Although low expense ratio is not just the only thing one must look for in a good fund. The fund philosophy also matters, a fund house focused on costs may lower expense ratio on matter of principle, a fund house wanting more AuM may drop expense ratios for a completely different reason.

Therefore, the formula for a good fund should be combination of steady performance over the long term by following prudent investment philosophy with minimal expenses.

Hence, to avoid having high impact of high expense ratio, it is highly important for you to do your homework and choose your fund that as per the above formula is a combination of low expense and prudent investment philosophy.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments