Before investing in Mutual Funds, know what is Expense Ratio? Otherwise, instead of profit, you will have to suffer huge loss.
Business News Desk – The method of investing in mutual funds through SIP is becoming increasingly popular these days. SIP is considered one of the best investment options. Despite being a market linked scheme, it is considered less risky than investing in direct shares. Most experts consider its average return to be 12 percent. Due to the advantage of compounding, good profits can be earned from this scheme in the long term. SIP is considered a very good scheme in terms of wealth creation. But if you are planning to invest in it then you must first know about the expense ratio. Generally people think that if the return of a fund is 12 percent or 15 percent then they will get full benefit from it, but it is not so. Expense ratio comes in the way of putting a dent in profits. Know about it here.
What is expense ratio?
Asset management companies (AMCs) manage mutual funds. Along with bearing the expenses of fund distribution and marketing, the AMC also bears the expenses like transfer custodian, legal and auditing of the mutual fund. All these expenses are recovered from the investors purchasing mutual fund units. The net asset value of a mutual fund scheme is calculated after deducting all such expenses. In simple words, the management cost of your mutual fund is called expense ratio. The expense ratio of any fund decides how cheap you will get the fund. A higher or lower expense ratio also affects your returns.
Expense ratios are not calculated all at once
Every company decides its own expense ratio. Expense ratios are not calculated all at once. Fund houses calculate their daily expenses, which are then calculated on a daily basis. The annual expense ratio is divided by trading days in the year. Which are applied to the total NV. Expense ratio shows how much fees your mutual fund management is taking from your investment portfolio.
There are many types of mutual funds
There are many types of mutual funds like equity fund, debt fund, balanced or hybrid fund. Equity funds invest money borrowed from investors in shares. Debt funds invest in fixed income instruments such as treasury bills, corporate bonds and government securities. Hybrid funds contain a mix of equity and debt funds.
