An expense ratio is a ratio that measures the per unit cost of managing a fund. The figure is arrived at by dividing the fund’s total expenses by its assets under management. There are various costs the AMC incurs which forms part of the expense ratio. For example, the AMC has a fund management team which consists of highly qualified professionals who track the markets and companies in the portfolio. They make decisions to buy and sell securities to meet the objectives of the scheme. In addition, the asset management company also incurs expenses such as transfer and registrar, custodian, legal, audit fees, and fees to be paid for marketing and distribution of its products. These costs are recovered through its unitholders on a daily basis. The daily net asset values (NAVs) of a fund scheme are reported after deducting such expenses.
There are different components to Expense Ratio.
- Management fee: A mutual fund is a professionally run scheme so you have professionals who you actually select different schemes and there’s a lot of research that goes into it so the fee which is charged by those professionals is categorized as a management fee.
- Administrative cost: All the cost associated with customer support, record keeping as well as offices are all categorized under admin cost.
- Sales and distribution: The cost associated with marketing mutual fund schemes and also the fee which is paid to the different broker’s or distributors are categories under sales and marketing.