What is Mutual Fund Expense Ratio and how to calculate it?

Short Answer

The expense ratio in the case of mutual funds sector refers to the measure of the amount costs by an investment company for operating a mutual fund.

Detailed Answer

Experts may calculate mutual funds expense ratio based on an annual calculation by giving the complete funds operating expenses by an average of the rupee value of its AUM i.e. Assets Under Management. Few experts also call it MER i.e. Management Expense Ratio.

Function of Expense Ratio

The main role of this ratio is to exclude operating expenses present in the assets of a fund and at the same time, lower the return to investors in the fund. Expense ratio expresses the actual percentage of various assets, which undergo deduction in each fiscal year for available fund expenses, including management fees, 12b-1 fees, administration fees, operating costs and many other costs related to assets incurred from the available funding.

Calculation of Expense Ratio

Experts have calculated mutual funds expense ratio based on following two important categories, as mentioned here.

Annual Gross Expense Ratio

Annual gross expense ratio associated with mutual funds refers to the specific percentage of fund assets, which individuals pay for management fees, operating expenses, and interest expenses. Gross expense ratio includes following important types of fees-

  1. Dividends and interests on borrowed securities
  1. Administrator
  1. Accounting,
  1. Audit,
  1. Advisory,
  1. Custodial distribution (Board of directors, organizational)
  1. legal,
  1. professional shareholder reporting,
  1. transfer agency costs
  1. Sub-advisor.

In this case, expense ratio never reflects brokerage costs of funds or sales charges of investors.

Moreover, this type of ratio excludes fee waivers for a particular period. Experts also call this ratio as audited gross expense ratio and often they opt to calculate it with the help of the audited annual report obtained from the fund. Annual report on expense ratios highlights about the actual fees charged for a specific fiscal year, while prospectus report reveals only material changes take place in the structure of expense associated with the present period.

Annual Net Expense Ratio

Annual Net Expense Ratio indicates the actual fund assets’ percentage paid for management fees and operating expenses. This ratio includes the following important fees,i.e. administrator, accounting, auditor, advisor, the board of directors, distribution in the form of 12b-1, custodial, organizational, legal, professional, shareholder reporting, on borrowed registration, transfer agency and sub-advisor.

The main difference of net expense ratio with the gross one is that the net expense ratio includes fee waivers associated with the period and excludes dividends and borrowed securities. Expense ratio in this case does not highlight brokerage costs associated with the fund and any kind of charge of investor sales. Experts call this as an Audited Expense Ratio and it pulls the annual ratio of net expense from the audited annual report associated with mutual funds.

However, similar to the case of the gross expense ratio, in the case of an annual report about net expense ratio, it highlights actual fees charged for a specified fiscal year and prospectus type of expense only provides details about material variations cause of the expense structure of the current period.

Tagged With: mutual fund expense ratiomutual fund
Categories: Mutual Funds
Comments (0)
Related FAQs

What is difference - Mutual Funds vs Index funds?

The differences between index funds and mutual funds are vast. Learn what is mutual fund and index fund and know what differentiates the two investment options.

What is difference between Mutual funds and Hedge funds?

In a way, there are a lot of similarities between Mutual Funds and Hedge Funds. In the both types of investments, a group of investors pool their money and invest in different type of securities. The main misconception about the funds is that people think that they are similar and the terms are interchangeable. In reality, they are not same and there is a very thin line between them.

What are Mutual funds serviced by Karvy? Complete list

Karvy has gradually grown as one of the largest Mutual Fund RTA companies after being established in 1982. One of the main strengths of a Mutual Fund RTA is the facility to offer a wide range of Mutual Funds to the investors in one place.

What is Mutual Fund? Meaning

A Mutual Fund is an expertly overseen speculation subsidize that pools cash from a few speculators to purchase protections. These financial specialists could likewise be retail or institutional in nature.

Are market highs good to invest in Equity mutual funds?

Understanding the relative position of the market, the absolute values do not matter much. What matters is what is the earnings multiple, currently the market is trading at, popularly captured by a metric called P/E ( Price to earnings).

Who is the Mutual Fund Regulator in India?

Mutual funds are regulated by SEBI ( Securities and Exchange Board of India). SEBI regulates mutual funds as 1996 Mutual fund regulation. SEBI is also the regulator for wider capital and securities market in India. SEBI was formed in 1988 as a statutory body and drives it powers from SEBI act 1992.

Should you take a Loan to Invest in Mutual Funds?

Borrowing money for investing in mutual funds never really pays off. Its not the right thing to do given that mutual funds returns would not provide sufficient returns in the time which your loans have to be paid back.

What is difference between Fixed Deposit vs Mutual Fund? Meaning

Fixed Deposit (FD) are saving tools offered by banks to deposit lump sum amount for a fixed period of time on a higher interest rate than saving accounts. Mutual funds are investment products which pool money from numerous small investors to create a fund.

Can Mutual Funds Help in getting 80C benefits ?

Mutual funds for 80c benefits also called ELSS or tax saving funds are one of the most prominent and lucrative investment options to save taxes as well as grow money. Primarily because the have lowest lock-in period amongst the 80c investment options and have historically delivered best returns.

Can NRIs invest in mutual funds in India?

Yes, any NRI can invest in mutual funds in India, if they follow some certain conditions under Foreign Exchange Management Act or FEMA Act 1999.