Your Money: How the Total Expense Ratio Affects Mutual Fund Net Asset Value


By Hemanth Gorur

Mutual fund investors generally expect the net asset value (NAV) of the mutual fund in which they have invested to appreciate based on the market prices of stocks and bonds held by the mutual fund. When that doesn’t happen, investors are surprised.

The culprit is something called the Total Expense Ratio (TER), or plan expenses. The daily net asset value of any mutual fund reflects these expenses. Let’s understand how.

Types of expenses
Any mutual fund plan incurs certain expenses in the operation and operation of the plan. One of the main components of these expenses are the investment and advisory fees, which are mainly related to the expertise and efforts of the fund manager.

The other main component is what is called recurrent expenditure. These include marketing and sales expenses incurred by the system, commissions paid to agents, brokerage and transaction fees, documentation fees and legal publicity fees.

They also include insurance premiums, audit fees, registration service fees and fund transfer fees incurred by the scheme, as well as certain expenses specific to the type of mutual fund scheme in question. . All of the above expenses constitute plan expenses. When taken as a ratio of plan assets, we get the TER.

Calculation of NAV and TER
Net asset value is the current market value of each unit of the mutual fund, which is initially sold at a face value of Rs 10 per unit to investors. The number of units in circulation in the scheme, multiplied by the face value of Rs 10, is called the unit capital.

Funds raised from investors are invested in stocks and bonds, the value of which appreciates or depreciates, leading to gains (or losses) in valuation. In addition, the scheme may generate dividend and interest income. This income less the plan’s expenses is the cash profit (or loss).

From now on, the net assets of the mutual fund are calculated as follows:
Net Assets = Unit Capital + Cash Profits (or minus losses) + Valuation Gains (or minus losses)
NAV = Net assets / Number of units in circulation
TER = plan expenses / net assets

TER for different MF categories
In accordance with the SEBI (mutual fund) regulations of 1996, there is an established limit for the TER on various categories of mutual funds. For funds of funds investing in index funds or exchange traded funds, the TER limit is 1% of daily net assets, while the limit for those investing at least 65% of assets under management in shares is 2.25%. The TER limit for all other funds of funds is 2% of daily net assets.
The TER limit for index funds and exchange traded funds is 1% of daily net assets. For all other open-ended schemes, on the first Rs 500 crore of daily net assets, the TER limit is 2.25% for equity schemes and 2% for non-equity schemes. After the first Rs 500 crore, the daily net assets are divided into further tranches on which the TER limits continue to decrease until they reach 1.05% for equity plans and 0.8% for schemes without capital.

Spending Matters
The daily net asset value of any mutual fund reflects the expenses of the plan
The total expense ratio is the ratio of plan expenses to net assets
Actively managed MF schemes like equity/debt schemes have a higher TER

The writer is the founder,

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