What is a mutual fund Expense Ratio?

The cost ratio is a percentage used to indicate how much you are forking over to the AMC to manage your investments. In other words, it represents the expense per unit incurred to operate and manage the mutual fund. Expense ratios vary from mutual fund to mutual fund. This expense ratio is determined as a percentage of the daily investment value; you do not pay for it separately.

For instance, if you invest Rs 5000 in a mutual fund with a 2% fee ratio, each day's investment value will be reduced by (2%/365=0.0054%). The expenditure ratio is assessed daily, ensuring that you only pay for the time you remain invested. However, this spending ratio deduction is reducing your returns by a very small amount every day. As a result, a mutual fund scheme with a lower expense ratio is better for you since it deducts less money from your returns.

The formula for Expense Ratio

Total expenses paid by the mutual fund are equal to the expense ratio (Average assets under management)
Total expenses for the fund are equal to those incurred by the AMC, such as fund manager fees, marketing and distribution charges, and legal and audit fees.
The sum of all investors' investment in that fund is equal to the average assets under management.

Total costs that are borne by the fund= The costs incurred by the AMC mentioned above like fund manager’s fee, marketing, and distribution expenses, legal/audit costs

Average assets under management= The total value of all investors’ money in that fund