Don’t Judge A Mutual Fund Only By Its Expense Ratio

Yogesh Pal Singh

Some of my older mutual fund (MF) investments are through an agency and some are direct. What is the brokerage charge for MFs? How are returns affected due to brokerage fee?

When you talk about brokerage charges, I am assuming that you are talking about the commission an intermediary or agent gets or the total fee charged by a mutual fund. For this we need to understand the expense ratio of a mutual fund scheme.

Every mutual fund scheme charges a fee, called expense ratio. This is expressed in percentage per annum. It is used for administrative, management and all other expenses, including the intermediary expenses or distributors’ commission. How much schemes charge is regulated by the Securities and Exchange Board of India (Sebi). The ratio is normally 1.05-2.25 per cent for equity-oriented mutual funds and 0.07-2 per cent for most other schemes, excluding exchange-traded funds (ETFs), index funds and fund of funds.

Debt funds normally have lower expense ratio compared to equity funds; passive funds (index funds and ETFs) lower than active funds; and direct plans are cheaper than regular plans. A regular plan includes distributor commission whereas a direct plan does not. The difference in expense ratio between the two types of plans differs from scheme to scheme.

You can find out the expense ratio for the direct and regular plans for all the schemes in your portfolio and see the difference. You can assume that to be the intermediary commission. Returns are proportionately impacted by expense ratios.

Expense ratio should not be the only parameter to choose or reject a fund. It will be incorrect to assume that the scheme with the lowest expense ratio will be the best performer. We need to see the objective of the scheme and whether it is suitable to the investor’s risk appetite.

Your portfolio returns will depend not on the expense ratio but on selecting the right schemes as per your time horizon and risk-taking capacity, and by monitoring your portfolio regularly.

UMA S. CHANDER, Certified Financial Planner CM , Handholding Financials

B. Pathak

My son will join college next year and for the fees and other expenses, I want to redeem some of my mutual fund investments. Should I wait a little longer before withdrawing and give the money a chance to grow further?

You have not mentioned whether the investments in mutual funds are in debt or equity funds. If the investments are in pure equity funds, as the goal is only a year away, it is better to move only the required amount for your son’s expenses and fees into very short-term debt funds like ultra short duration and low duration funds or bank fixed deposits. This way there will be no reduction in the accumulated value. Equity markets can be volatile in the short term, so it is not advisable to continue keeping the required amount in equity. As soon as you need the money for your son’s fees and expenses, you can redeem from the debt funds or the fixed deposits.

Suhel Chander Certified Financial Planner CM, Handholding Financials

Anna Gope

My Public Provident Fund (PPF) matured this year. But I don’t need the money yet. Should I restart a PPF or invest this money elsewhere? Apart from PPF, for retirement planning (some 20 years later), I have Employees’ Provident Fund, some real estate and an insurance retirement plan.

PPF is a good option for people who are risk averse. Returns are tax-free. Interest rate changes are as declared by the government on a quarterly basis. Returns are 7-7.5 per cent for the past few years. In your case, as retirement is after 20 years, to beat inflation and create more wealth, consider investing in good equity mutual fund schemes from categories such as flexi-, small-, mid-, large- or multi-cap funds depending on your risk profile. Over a long term (more than 10 years), equity investments can give inflation-beating returns. Once retirement is nearing, equity exposure can be reduced and money can be invested in suitable categories of hybrid mutual fund schemes where there is both equity and debt exposure and the returns are tax efficient. Asset allocation (based on risk profile) is the most important factor in investment planning. See that you divide your investment in different baskets.

Hina Shah, Certified Financial Planner CM and Coach,  LUHEM