A high expense ratio or fund management cost will reduce returns and the value of your investments.
What is an Expense Ratio?
A mutual fund or PMS manager while floating or running a fund has to manage a number of expenses. It includes management fees, operating expenses, exit load, brokerage fees, etc.
These expenses are levied upon the investors and deducted from the total value of the fund before distributing it to investors.
The expense ratio depends upon a lot of factors like size of the fund, style of investment, and category of the fund. Depending upon these factors, the expense ratio could range between 0.10% to 2.50% for a mutual fund scheme.
How Does This Cost Differ Across Different Products?
A fund with lower assets under management (AUM) will have a relatively higher percentage of expenses in proportion to the overall fund size. Hence, their expense ratio will generally be higher. As AUM improves, the funds’ expenses also reduce proportionately.
The style of investment – active or passive – is also a contributing factor in determining the expense ratio. An active fund will have to frequently churn the portfolio, hence the expense ratio will generally be higher. Passive funds, deploying capital in index products have low operating expenses. The expense ratio will hence be lower.
Usually, large-cap funds will have high AUM and stability. Hence, it will have a lower expense ratio. A small-cap fund, on the other hand, will usually carry a higher expense ratio.
How Costs Impact Returns?
Expenses and costs are deducted from the total revenue generated by a mutual fund, before disbursing it to the investors. Hence, the higher the expense ratio, the lower will be the return generated by the scheme.
Let’s consider this example,
If you invest Rs 5 lakh in a mutual fund that generates a return at a 15% CAGR. It will grow to Rs 5,75,000 in the second year. If the expense ratio of this scheme is 2%, then at the end of the year Rs 11,500, will be deducted as an expense and the value shown in the statement will be 5,63,500.
So, effectively the return is reduced from 15% to 12.70%. This cost continues to grow at a compounded rate if you stay invested for a long period of time.
How Does Teji Mandi Do Things Differently?
Rather than sticking to an AUM based percentage, Teji Mandi works on low fixed-cost pricing. Teji Mandi charges begin at a fixed price of just Rs 149/month for 6 months. Some of our partner brokers (discount brokers) charge a small one-time fee and no brokerage on every order. Some charge a brokerage on every order. Make sure you check these costs at the end of the month to calculate your final return.
This cost remains the same whether you chose to invest the minimum of Rs 20,000 or Rs 20 crore. In absence of percentage-based charges, investors can maximize returns as they invest more in the Teji Mandi Portfolio.
As our operational expenses do not increase with investments, costs reduce as investors invest more. As a result, the costs undercut the percentage of expenses charged by equity mutual funds and PMS products. Investors benefit from the higher returns offered by an equity product like Teji Mandi as well the low costs associated with portfolio management.
In addition to these costs, we also offer easy to understand insights about our every stock pick – buy or sell. The goal is to keep you informed and make you a more informed and smarter investor. Through our SIP feature, or through regular top-ups, I urge you to keep on investing small amounts in the portfolio to take advantage of these lower costs.