You Should Know This To Make More Profits From Mutual Funds

Just every other mutual fund out there won't generate the best returns. There are a few basic rules that you need to follow to get the most out of your investments. Let's discuss these in this article.

Before getting on how to generate the most returns, let me explain a simple term called the expense ratio. I know I have explained previously in one of my articles but I will go in-depth on expense ratio and how can it help you generate the most returns in this article so read it till the end.

What is the expense ratio?

We invest money in the mutual fund. This means we are giving our money to an asset management company (AMC) that invests this into different assets - stocks, bonds, gold etc. Now, this AMC has its own expenses - paying salary to its employees, advertisement and a lot more. How do they get money to pay for these? They pass on these charges to the investors of the mutual funds. These charges are calculated by a numerical value that is associated with each mutual fund and it is termed as the expense ratio. It is in the form of a percentage.

What is the relation between AUM and Expense Ratio?

AUM stands for Assets Under Management and it is the value of the total investments that a mutual fund makes on behalf of its client. Suppose mutual fund X has only three investors A, B, C who have invested ₹1000 each in their scheme. So, the AUM of mutual fund X is ₹3000.

It is a general trend that has been observed worldwide that with the increase in the AUM of a fund, the expense ratio gradually decreases. Any smart investor will always look forward to investing in a mutual fund whose expense ratio is the least so as to benefit the most.

How expense ratio is killing your profits?

The maximum that a mutual fund can charge, in India, as expense ratio is as follows-

• 2.5% in case of equity funds

• 2.25% in case of debt funds

• 1.5% in the case of index funds

Though these are the maximum levels, most of the mutual funds usually charge 1-2% while index funds charge even lower i.e. <1%. I have only seen a few funds charging more than 2%. Let's come back to the topic.

You might be thinking 1-2% of your investments paid as the expense ratio do not sound big but let me show you how much profits are you killing by not getting serious regarding the expense ratio.

As you can see from the above sample investment, a person invests ₹1 lakh in two mutual funds. Both the mutual fund deliver an average return of 15% per year. Mutual Fund 1 has an expense ratio of 1.5% while mutual fund 2 has an expense ratio of 0.5%, This investment is made at once and not in the SIP format.

After 20 years the investor decides to withdraw from the fund. When he withdraws it from Mutual fund 1, he gets ₹12.5 lakhs approximately. His 1 lakh investment has grown 12 times in these last 20 years. Pretty impressive? Let's check the figures from the 2nd fund.

Withdrawing from Mutual Fund 2, he gets ₹15 lakhs approximately. Yes, you read it right! Both the mutual funds were providing equal returns and the investment time frame is also the same but the 2nd fund delivered ₹2.5 lakhs more. Know how that happened? If your answer is the expense ratio, you got the correct answer. That 1% difference in the expense ratio cost him around ₹2.5 lakhs.

How to know the expense ratio and AUM of a mutual fund?

I use an app called Groww to research, invest, track my mutual fund investments. I have been using it for quite some time and found it very handy. They provide all information regarding the mutual fund from AUM to expense ratio to historical returns to exit load. No, I am not sponsored by Groww. I am just expressing my personal opinion.

However, if you are planning to open an account using Groww and invest in mutual funds, you can use my referral link, through it both of us can get ₹100 deposited in our account when you activate your account on Groww. It is a win-win situation. Click here to open an account on Groww.

And with this, we have reached the end of yet another article. I hope this helps you in enhancing your knowledge of mutual fund investments. Consider giving it a like and sharing it among your friends and family. It will motivate me to keep writing new articles for you. To get notified whenever I publish new articles, sign up to the NerdyTree by hitting the "log in" button at the top of the page.

Let me know if you have any queries regarding the same.

Recommended Article: SIPs- The Safest Way To Increase Your Net Worth.