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Expense Ratio
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What is Expense Ratio?
Expense Ratio if the expenses incurred for running and maintaining the scheme.
This includes all expenses that the scheme has incurred in running the scheme, such as, Administrative, management, advertising expenses, commission to distributors etc.
Each plan of the scheme will have a different expense ratio.
In most cases, DIRECT plans have lesser expense ratio compared to REGULAR plan.
An expense ratio of 1% per year means that each year 1% of the fund's total assets will be used to cover expenses.
So, the lower the expenses are, the better it will be for its investors.
Usually, a 1 to 1.5% for an Equity mutual fund under DIRECT plan is a common expense ratio.
The higher the AUM of the scheme, the lower the expenses will be. So, in general, it is better to invest in a higher AUM scheme over a tiny AUM scheme when considering expense ratio factor.
Investment management of a passive mutual funds does not involve active stock or sector selection or churning or make large portfolio changes in one go. Hence, expenses of a passive fund are lower than that of an active fund.
Expense ratio of debt schemes is more important than that of equity scheme.
Institutional plans are offered with lower expense ratios for large investors.
Common regular recurring expenses
- Fees of various service providers, such as Trustees, AMC, Registrar & Transfer Agents, Custodian, & Auditor
- Selling expenses including scheme advertising and commission to the distributors
- Expenses on investor communication, account statements, dividend / redemption cheques / warrants
- Listing fees and Depository fees
- Service tax
Total Expense Ratio
The total expense ratio, or TER, is a measure of the total cost of a fund to the investor.
Total costs may include various fees (purchase, redemption, auditing) and other expenses.
The TER is calculated by dividing the total annual cost by the fund's total assets averaged over that year, and is denoted as a percentage.
Why is there so much difference in various plans of Franklin High growth companies fund
Franklin High growth companies fund has expense ratio is 2.3% in regular plan but 1% in direct plan
This might be due to the case where most of the investors in the scheme are with DIRECT plan and very few in the REGULAR plan.
How can we get to know this?
We can get the AUM data for every scheme and plan from AMFI Website
https://www.amfiindia.com/research-information/aum-data/average-aum
- Franklin India High Growth Companies Fund - Direct - Dividend: 12605.49
- Franklin India High Growth Companies Fund - Direct - Growth: 49592.93
- Franklin India High Growth Companies Fund - Dividend Plan: 110607.76
- Franklin India High Growth Companies Fund - Growth Plan: 336012.96
From the above data, it is clear that DIRECT plans are not the core contributors of assets.
So, the next possibility is money given to distributors.
Looks like the REGULAR plan of this scheme is paying distributors well.
SEBI on additional expenses of up 0.20%
Proposal for amendment of the regulatory provision permitting charging of additional expenses of up to 0.20% of the daily net assets of MF Schemes
On March 28, 2018, SEBI vide PR No. 09/2018 said:
Presently, mutual funds are permitted to charge additional expenses of up to 0.20% of the daily net assets of mutual fund schemes in lieu of the exit load credited to the scheme. Based on data and the recommendations of Mutual Fund Advisory Committee (MFAC), the Board approved the proposal to reduce the maximum additional expense permitted to be charged to a mutual fund scheme from 20 bps to 5 bps.
Related Topics
- Mutual Fund Units
- New Fund Offer (NFO)
- Net Asset Value or NAV
- Know Your Customer / KYC
- Systematic Investment Plan and Compounding effect
- Systematic Transfer Plan (STP)
- Systematic Withdrawal Plan (SWP)
- SIP vs Lumpsum Investments
- Open-ended, Close-ended and Interval schemes
- DIRECT plan vs REGULAR plan
- GROWTH option vs DIVIDEND option
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