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Low Expense Ratio, High Impact on Investments

Posted On Thursday, Aug 30, 2018

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. The below table shows how much, a high expense fund tends to lose a lot of the returns eventually generated.

Average AUM (INR)100,000100,000100,000100,000
Gross returns15%8%15%8%
Expense as % of avg. AUM2.5%2.5%1.25%1.25%
Net returns12.5%5.5%13.75%6.75%
Gross returns in INR15,0008,00015,0008,000
Expense in INR2,5002,5001,2501,250
Net returns in INR12,5005,50013,7506,750
Expense as % of returns16.67%31.25%8.33%15.60%

Note: The figures used in the above table are for illustrative purposes only.

In the above example it is seen that expense, as a part of returns, is as high as 31.25%. We have considered only positive returns scenario. A negative return scenario would be even more devastating.

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.

Call us on 1800 – 209 – 2863 / 1800 – 22 – 3863 OR email CustomerCare@QuantumAMC.com

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. 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.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.