There is No Fate But What We Make: The focus needs to be on the expense ratio

Sunday, June 21, 2009

The focus needs to be on the expense ratio

It's heartening to see the attempts to reduce the entry load for mutual funds. However, the thing that is more insidious is the annual expense ratio. Let's consider that 1 Lakh rupees is invested for my retirement which is 25 years away. Let's say I save the entry load by going direct. Consider a fund that makes 10% CAGR and has a 2% expense ratio. The investment grows to Rs. 6,53,840/-. Now assume I pay 2.25% entry load but the expense ratio is 1.5%. In this case the investment grows to Rs. 7,25,843/-. This is more than 11% higher than the earlier case. So it's clear that common investors are better served if the focus is on reducing the expense ratio. Compared to the western countries, Indian funds charge 2% or more in terms of expense ratio. Even index funds which don't have to hire a fund manager charge more than 1%. Retail investors should make a concerted effort to reduce the annual expense ratio charged by the mutual funds.

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