Equity mutual fund expense ratios – how do they hurt your investment?

Capital Orbit was quoted in today’s Times of India, on the topic of equity mutual fund expense ratios in India. Equity mutual funds are a good route to enter the market for those who are not ready for direct stock investing. And I surely would not recommend direct stock investing without the necessary understanding and homework. An often overlooked part about equity mutual funds is the expense ratio that is charged and deducted from the fund corpus.

Read the Times of India article with the Capital Orbit quote.

Equity mutual fund expense ratio experiment

I have created a simple Excel illustration that you can download and try out yourself. The assumptions are as follows:

  • Initial amount is Rs. 1,00,000/-
  • Two equity mutual funds
  • Investment held for 15 years
  • Growth rate per annum is 15%
  • Expense ratio of one equity mutual fund is taken to be 2.25%, while the other is considered to be 1.75%

The results are interesting. What looks to be a minor difference of 0.5% in the expense ratios is of major consequence in how big the investment grows to after 15 years.

The fund that had an expense ratio of 2.25% returns an amount of Rs. 5,78,388 while the other fund which had an expense ratio of 1.75% returned an amount of Rs. 6,24,390.

The fund with lower expense ratio of 1.75% gives close to Rs. 46,000 more or 8% more than the other fund.

Like the Hindi saying, “Boond boond se saagar banta hai”!

Download the Excel illustration

Expense ratio is not the only consideration

There are funds which charge lower expense ratios than most others. Do not let that be a deciding factor. Please also look at the comparative performance of the particular fund versus others in its category. The core job of the mutual fund manager is to grow your money. If that is not happening then all other considerations are futile.

An interesting combination of good performance and low expense ratio is seen in a scheme by Quantum MF called Quantum Long Term Equity Fund.

Quantum Long Term Equity Fund details from Quantum MF website

Comparative performance of this fund in diversified equity category

As of the date of writing this article, the expense ratio for this fund is 1.25% which is lower than most others which are 2% or higher. It ranked third in its fund category as per Moneycontrol data with a compounded annual return of 9.4% over a 5 year period.

Disclaimer

  • I do not stand to benefit in any way, monetarily or otherwise from mentioning Quantum MF and their investment products.
  • I hold investments in mutual funds in Quantum MF scheme
  • Read the standard disclaimer anyway.

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