Expense ratios are frequently getting revised these days. Do you need to act upon it? Does expense ratio really matter for your?
Let’s understand first the term ‘expense ratio’.
It includes all expenses incurred in NAV is declared after accounting for such expenses on a daily basis. Annual expense ratio of one percent signifies that every year about one percent of your go towards paying these expenses.operations including fund , registrar and transfer agent fees, sales commission and other related costs. A fund’s
Cheap and best
Expense ratio of aaffects returns. For instance, an of Rs 1 lakh into a with one percent expense ratio appreciates to Rs 1.69 lakh over a five-year period (at 12 percent per annum). It will be yield Rs 7,455 more than a having an expense ratio of two percent.
Since April of this year, Sebi, the
However, many continue to have higher expense ratios than prescribed by Sebi and some are even revising it upwards. Investors need to adopt a diverse strategy based on the category of the .
1. Large cap
Currently, large capcharge anywhere from 1.69 to 2.67 percent. Some are charging off-limits. However, all large cap with size about Rs 10,000 crore are currently charging lower than 2 percent. If you want to in large cap , choose a good performer with a large . This will automatically bring down its expenses. And with ample liquidity in the large cap space, its size will not come in the way of performance.
Equity passively mimics the of the index under consideration. This is one category, where expense ratio acts as a key differentiator. and can’t charge more than 1 percent annually, as per current regulations.
Exchange-trade- or (below 0.2%) have been found to be much cheaper than a traditional . Choose an which is cheap and has the least tracking error.
3. Midcap and small cap
No other category has so much divergent performance as a midcap or a small cap. If you had invested in a small cap last year, your returns could have been anywhere from -19% to a positive 22%.
For these categories of , outperformance matters more than the expenses. in with superior performance, rather than just in those with lower expense ratios.
4. Debt funds
In case of debt funds, where the absolute gains are relatively smaller, expense ratios are usually lower. As against the regulatory cap of 1 percent, are, on an average, charging only about 0.29 percent.
Go beyond just returns, and look at construction, while in short-end . Often, with higher expense ratio take higher risk in order to cover up expenses. Compare apples and apples and scout for large-sized which in turn will bring down expenses.
Expense ratio matters – be it for debt or . Choosing a with large size can bring down expense ratios. But such strategies can backfire in case of small cap or midcap . In short, look for value and not just a cheap fu