Mutual funds are a preferred option for many because of the returns they offer. Yes, there are risks involved too but they are a potent vehicle for investment.
There are several costs which need to be considered when you manage your money through a mutual fund. These include fund management, custodian, registrar and transfer agent charges. Also, one needs to take into account marketing expenses, commissions payable as well as several other recurring costs.
All these costs come under different pointers and they are calculated under one single umbrella which is then charged to the scheme as a percentage of the assets managed. It is called expense ratio (or total expense ratio – TER) of the scheme.
TER is a number that is calculated as a percent of the daily assets of the scheme. It is always available on the website of the mutual fund and also in the fact sheet.
All the regular plans of the mutual fund schemes are sold by distributors and the TER of these schemes is reflected in the commission which is payable along with other expenses. Hence, if you like doing it all by yourself, you can invest in direct plans.
Fund houses are responsible for changing the expense ratio quite frequently. They offer low expense ratio which is a great way to bring in investors and it is hiked within the limit which is prescribed by the Securities and Exchange Board of India (SEBI).
Equity funds can charge up to 2.25 percent, while the non-equity schemes can charge up to 2 percent as base expense ratio. This expense ratio can be brought down as assets under management (AUM) increase. One should understand that all the exchange traded funds that invest in indices and gold cannot charge more than 1 percent as base TER. These are all according to guidelines by SEBI.
Funds are also allowed to charge an additional 30 basis points towards expenses if the inflows are from other than the top 30 cities in the country.