InvestorQ : What is expense ration in buying the Mutual funds?
Nishita Gala made post

What is expense ration in buying the Mutual funds?

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Diya Chitale answered.
11 months ago

Every Asset Management Company (AMC) has a team of experts to manage the fund, which consists of qualified professionals for effective management of the fund and to take the day to day decisions of the fund. The expense Ratio also is known as Management Expense Ratio (MER) that measures the unit cost of managing the fund or how much amount the company charges from its investors to manage the fund. It measures how much assets of the fund are used to cover the different expenses of the mutual fund. The expenses of the fund can be fixed and variable. The expense ratio represents the Administrative cost, Distribution Fees, advertising and promotion expense and Management Fees, etc. of the fund.

Expense ratio has the following components:-
Management Fees
Administrative costs
Distribution fee and promotion expenses
Fee for transfer and Registrar agents
Legal expenses and Audit Fee
Registrar services for transfer of units sold or redeemed 
Fees and expenses of trustees 
Custodian fees ;
For example, 
If you invested Rs 20,000 in a fund that has an expense ratio of 1.5%, it means that you have to pay Rs. 300 to the Asset Management Company (AMC) to manage your money.
The expense ratio is calculated by dividing a mutual fund’s total operating cost/expenses by the total value of the assets of the fund.

Expense Ratio= Total Fund Costs/Total Fund Assets

A higher expense ratio means lower profit and a lower expense ratio means higher profit. 
All the expenses must be as per Regulation 52 of SEBI Mutual Fund Regulations. 
As per these regulations, the Total Expense Ratio (TER) allowed is 2.5% for the first Rs.100 Crore of average weekly total net assets, 2.25% for the next Rs.300 Crore, 2% for the next Rs.300 Crore and 1.75% for the rest of the Assets under management (AUM).