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How is Expense Ratio Calculated 2022 – Components, Analysis & Calculation

Want to calculate expense ratio for mutual funds in 2022? Here is all you need to know about expense ratio, components and how it is calculated. Read to know more.
Mutual Fund Expense Ratio

Introduction to expense ratio

To run and manage a mutual fund scheme, the fund house has to incur various expenses regularly. All these expenses are clubbed under the expense ratio head and charged to the mutual fund scheme. This blog will cover how the expense ratio is calculated – Components, analysis & calculation.

What is an expense ratio?

When you invest in a mutual fund scheme, your money is invested by a well-qualified and experienced professional fund manager. The fund houses charge a nominal annual fee to all unitholders for providing these professional services. This fee is known as the expense ratio, and it is charged as a percentage of the total assets of the mutual fund scheme.

How is the expense ratio calculated?

The expense ratio is calculated by dividing the total expenses of the scheme by the assets managed under that scheme. You don't need a mutual fund expense ratio calculator to calculate the expense ratio of a particular scheme. The current expense ratio is displayed for every scheme on the mutual fund website.

Components of an expense ratio

Some of the components of an expense ratio, as allowed by SEBI, include the following:

Marketing and selling expenses, including commission payable to agents

  • This component usually forms a big chunk of the expense ratio. The agent commission is payable in the case of regular plans. Direct plans don’t have agent commission. Hence, the expense ratio for direct plans is lower than regular plans.

Transaction costs

  • These include brokerage and various Government levies paid for buying and selling securities transactions. There is regular buying and selling of securities in an active fund, whereas, in an index fund, securities are bought and held for a long time. Hence, the expense ratio for index funds is lower than active funds due to lower transaction costs.

Custodian fees

  • Whenever securities are bought, they are held by a custodian. At the time of sale of securities, the custodian charges a fee.

Administration expenses

  • This component includes the shared expenses of a fund house such as electricity bill, office stationery, office rent, and other admin expenses.

Other components of the expense ratio include fees paid for registrar services, fees and expenses of trustees, auditor fees, legal and compliance fees, costs of statutory advertisements, etc.

Limits on expense ratio

SEBI has fixed an upper limit on the maximum expense ratio that a mutual fund scheme can charge. Initially, the expense ratio may be high when the scheme is launched. As the assets under management (AUM) of the scheme go up, SEBI has prescribed a slab-wise limit based on which the scheme has to bring down the expense ratio.

Assets under Management (AUM)TER limit
Rs. 0 – 500 crores2.25%
Rs. 500 – 750 crores2.00%
Rs. 750 – 2,000 crores1.75%
Rs. 2,000 – 5,000 crores1.60%
Rs. 5,000 – 10,000 crores1.50%
Rs. 10,000 – 50,000 croresFor every Rs. 5,000 crores increase in AUM, the TER goes down by 0.05%
Above 50,000 crores1.05%

As seen in the above table, the assets under management (AUM) of a scheme and the expense ratio have an inverse relationship. Initially, when the AUM is low, the expense ratio is high. The scheme has to bring down the expense ratio as the AUM goes up.
To start investing in mutual fund schemes with a low expense ratio as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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