The most common question for mutual fund investors is the expense ratio. The expense ratio is 1% to 2% of the total asset under management for mutual funds.
Sounds so reasonable, but when you consider the same based on the profits, it is very high.
Let me explain with an example.
Let’s assume we have a mutual fund whose expense ratio is 2%. So if you invest ₹100,000 with the fund, the fee is ₹2000 every year irrespective of the returns.
Heads I win, tails you lose.
The longer-term average return for mutual funds in India has been close to 12%.
So for an investment of ₹1Lac, the return of ₹12k, you are paying ₹2k only to manage your money. Roughly ~15% of your profits.
So an expense ratio of 2% boils down to 15% profit sharing with the fund house.
By no stretch of the imagination, it is low.