What is expense ratio in the context of a mutual fund?

Expense ratio, as the name suggest, is the cost of expense incurred by an investment company to manage the funds of its clients. This is the fee charged by the investment company to manage the funds.

Mutual funds are managed by asset management companies (AMC). Sponsors create AMC and the trustees appoint AMC as investment managers. AMC hires professional fund managers to carry on all the buying and selling activities of the funds.

To know more about asset management companies click here.

The fund managers in return are paid which is included under the expense ratio. A large amount of expense is the fee that has to be paid to the manager of the fund.

Apart from manager's fee, all the investment companies have to incur some costs including taxes, legal expenses, administrative costs, marketing and advertising costs etc. So, all these costs comes under the head of expense ratio.

For example, if you invest Rs. 50,000 in a mutual fund and the expense ratio of the fund is 5 per cent, you have to pay Rs. 100 as expense ratio of the mutual fund.

The expense ratio does not take into account the buying and selling activities of the securities. Other costs like redemption fee, entry and exit loads, are also not included in the expense ratio of the mutual funds. These costs are directly paid by the investors or clients of the mutual funds.

Click here to know what is entry and exit load of mutual funds.

Mutual funds have now become a popular investment scheme as benchmark indices are high. Investors can choose from different options of mutual funds to invest. Read more on the different options of mutual funds to invest here.

Conclusion

You should know your risk appetite and have a clear idea on investment objective then invest in a mutual funds. Analyse the portfolio and take the help of professionals in choosing the fund that complies your investment objective and risk tolerance level.

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