Everything You Need To Know About Investing In Mutual Funds Expenses

It is a pretty established fact that mutual funds could be a beneficial investment option if invested right and markets corporate. But this success is based on several factors, For beginners, you must ensure you are investing in a fund that has the potential to grow in the future, This is done by carefully researching the fund’s past performance, future potential and other key figures.

Equally important is to check the costs associated with mutual fund investments If the costs are high, they may eat into your returns, diminishing the profit you earned. But how do you keep a track of this? Below are a few pointers you can check out for the same.

Keep an eye on the expense ratio

The biggest expense factor when it comes to mutual funds is the expense ratio. Let us understand this first before we discuss its impact.

Mutual funds are run by fund houses, also known as asset management companies. They appoint experienced fund managers to manage each fund. The role of the fund manager is to create and maintain a portfolio that matches the theme of the fund. For instance, if the fund is an aggressive fund, the manager will try to create such a portfolio and try to manage it in such a way that the best interests of the investors are kept in mind.

Now, to pay the fund manager and for the expenses related to the fund, the fund house has to levy a charge from its investors. It is usually a percentage of your investment. This is called the expense ratio of the fund, and it can be different for different funds. It is important to make sure the expense ratio doesn’t eat into your expenses while investing.

Passive mutual funds charge less expense ratio

As discussed above, an expense ratio is the most significant change that comes with investing in mutual funds. But these are different for passive and active funds.

An active fund is your regular mutual fund. Here, as said above, the fund manager has a role daily to monitor and protect the interest of the investor.

But this is different for passive funds.

Passive funds are where the role of a fund manager is limited. Here, the fund tracks a certain present portfolio as it is. The perfect example of this is an index fund. The same tracks the composition of the index funds. Here, the role of the manager is mostly limited to bringing about any changes where there is a change in the composition. Hence, the expense ratio is lower.

The expense ratio is charged on your whole investment

There exists a common confusion regarding how the expense ratio is charged. As said above, the expense ratio is a small percentage (on average 1%). But often, people have a misconception that this is charged on your profit alone. But this is not the case. In fact, the same is charged from your whole investment amount.

For instance, let us suppose you invest Rs.1 lakh in a fund and gain a profit of Rs.10,000. The expense ratio is charged from Rs.1.1 lakh and not Rs.10,000. If the expense ratio is 1%, you will be charged Rs.1100 and not Rs.100. Understanding this can help you better manage your mutual fund investments.

Understanding the expenses related to mutual funds is important in gauging the real returns from a mutual fund. Follow the above pointers to ensure you plan your mutual fund investments appropriately.