Expense Ratio: Understand it well before investing in mutual funds, otherwise your profits may get affected..

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 believe its average return to be 12 percent. Due to the benefit of compounding, this scheme can make a good profit 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. Usually, people think that if the return of a fund is 12 percent or 15 percent, they will get the full benefit of it, but it is not so. The expense ratio comes in between to dent the profit. Know about it here.

What is the Expense Ratio?

Asset Management Companies (AMC) manage mutual funds. AMC bears the cost of fund distribution and marketing, as well as expenses like transfer custodian, legal, and auditing of mutual funds. All these expenses are recovered from investors who buy mutual fund units. After deducting all such expenses, the net asset value of the mutual fund scheme is calculated. In simple words, the management cost of your mutual fund is called an expense ratio. The expense ratio of any fund decides how cheap you will get a fund. A low or high expense ratio also affects your returns.

Expense ratios are not recovered at once

Every company sets the expense ratio for itself according to its convenience. Expense ratios are not charged at once. Fund houses calculate their daily expenses, after which it is calculated daily. Annual Expense Ratios are divided into trading days of the year. Which are applied to the total NV. Expense ratios show how much fees your mutual fund management is charging from your investment portfolio.

There are many types of Mutual Funds.

There are many types of Mutual Funds such as Equity Funds, Debt Funds, and Balanced or Hybrid Funds. Equity funds invest the money taken from investors in shares. Debt funds invest in fixed-income instruments like treasury bills, corporate bonds, and government securities. Hybrid funds have a mix of equity and debt funds.