A mutual fund company incurs various expenses while managing a fund. It hires fund managers and analysts, pays salaries, operates offices, conducts research, and handles the buying and selling of securities.
To cover these operational costs, mutual funds charge investors a fee known as the expense ratio.
An expense ratio is the percentage of a fund’s annual expenses relative to its daily Assets Under Management (AUM).
The expense ratio can vary depending on the type of mutual fund and the plan chosen.
For example, the expense ratio of the regular plan of the HDFC Large Cap Fund is generally higher than that of its direct plan because regular plans include distributor commissions. Direct plans do not involve intermediaries, which is why they usually have lower expense ratios.
The expense ratio is also called the Total Expense Ratio (TER). It includes both recurring and non-recurring expenses incurred by the fund and is expressed as a percentage.
For instance, a 1% TER means the fund uses 1% of its total AUM every year to manage and operate the scheme.
Investors can check the expense ratio of any mutual fund scheme on the official website of the AMC.
Expense ratios are subject to change from time to time, and investors are informed whenever such changes occur. As per the Securities and Exchange Board of India (SEBI) Circular No. SEBI/HO/IMD/DF2/CIR/P/2018/18, all mutual fund schemes are required to disclose their Total Expense Ratio (TER) on a daily basis.
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