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Business Standard
04-07-2025
- Business
- Business Standard
Expense ratios: a quite wealth killer which eats up your mutual fund gains
Imagine two friends, Ramesh and Neha, who each invested Rs 10,00,000 in mutual funds 20 years ago. Ramesh chose a fund with a 2 per cent expense ratio, while Neha opted for one with a 0.5 per cent ratio. Both funds delivered the same gross return of 10 per cent annually. Today, Neha's portfolio is worth around ~62,00,000, about ~15,00,000 more than Ramesh's. A huge difference, right. Actually, expense ratio fees nibbled into Ramesh's wealth over the course of 20 years. This quiet wealth killer is the expense ratio, the annual fee charged by mutual funds. For most mutual fund investors, expense ratios are an often-overlooked detail. But experts warn that these fees can have a significant impact on long-term returns, especially when compounded over decades. Why do expense ratios matter? 'Expense ratios are the annual fees that mutual funds charge for managing your money. These may range from 0.2 per cent to around 2 per cent,' says Arjun Guha Thakurta, executive director at Anand Rathi Wealth. While passively managed index funds tend to have lower expense ratios (0.2 per cent-0.7 per cent), actively managed funds can go as high as 2 per cent. 'Over the long term, even a 1 per cent difference in costs can erode wealth substantially. If a fund consistently delivers returns above its benchmark, a higher expense ratio may be justified. Otherwise, that extra 1 per cent is simply a drag on your wealth,' Thakurta explains. Navy Vijay Ramavat, managing director at Indira Group, agrees. 'Expense ratios are deducted daily from fund assets, reducing NAV and lowering returns. For example, a fund generating 10 per cent returns before expenses with a 2 per cent expense ratio delivers only 8 per cent net returns. Over 20 years, that small difference could result in ~267000 less wealth per ~1000000 invested, a 43.6 per cent difference in final accumulation,' he notes. Active vs passive: What's worth paying for? Should investors prioritise low-cost index funds to minimise expenses? Not always, Thakurta says. 'In a developing market like India, small and midcap companies offer significant growth potential. Here, active funds, despite higher costs, may justify their fees if they generate consistent alpha.' Ramavat suggests a balanced approach. 'For core portfolio allocations, low-cost index funds can provide broad market exposure at minimal cost. Active funds can be used selectively in niche segments where managers have a proven ability to outperform.' What's considered high or low? As a rule of thumb, expense ratios below 1 per cent for equity funds and 0.5 per cent for debt funds are considered low in India. Ratios above 1.5 per cent for equity and hybrid funds or 0.75 per cent for debt funds are on the higher side, says Thakurta. Sebi also prescribes upper limits based on fund type and size, providing a regulatory framework to assess reasonableness. Reducing the drag without sacrificing returns 'Switching from regular to direct plans can shave off 0.3 per cent to 0.7 per cent annually, adding up to meaningful savings over time,' Ramavat points out. He also recommends using a core-satellite portfolio, combining low-cost index funds for the bulk of investments with carefully chosen active funds in specialised areas. 'Regular monitoring is critical. If a fund's expense ratio increases without an improvement in performance, consider switching,' Ramavat adds. However, he cautions against hasty exits. 'For existing holdings, weigh tax implications before making a move.' The bottom line Expense ratios may look like a small percentage, but their impact on compounding is huge. By making informed choices and ensuring that every rupee paid in fees delivers value, investors can significantly boost long-term wealth creation.
News18
26-06-2025
- Business
- News18
Multi-Cap Vs Flexi-Cap Funds: Choosing the Right Fit for Your Portfolio
As per AMFI's May 2025 data, Multi-Cap funds saw a net inflow of Rs 2,999.29 crore, while Flexi-Cap funds received Rs 3,841.32 crore. As equity mutual funds continue to gain traction among Indian investors, understanding the difference between Flexi-Cap and Multi-Cap funds is crucial for informed investment decisions. Experts highlight that the key difference comes down to one word—freedom. According to Navy Vijay Ramavat, Managing Director at Indira Group, Multi-Cap funds follow a SEBI-mandated structure—requiring a minimum 25% allocation each to large-, mid-, and small-cap stocks. This rule ensures disciplined diversification across company sizes, helping balance performance across market cycles. However, this structure also limits a fund manager's flexibility in responding to market changes, which may increase the risk-reward intensity during volatile phases. On the other hand, Flexi-Cap funds offer complete flexibility, as long as at least 65% of the assets are invested in equities. Fund managers can adjust allocations based on market conditions—going all-in on large-caps during downturns or shifting focus to mid- and small-caps during rallies. 'My style aligns more with Flexi-Cap," said Ramavat. 'It allows me to move across segments depending on where I see opportunities." He added that sectors often matter more than market caps, and being nimble across segments creates opportunities—especially for short- to mid-term traders. 'Cash is also a position," he noted, highlighting the importance of timing and allocation. Echoing this, Manish Kumar Goyal, Chairman and Managing Director at Finkeda, emphasised that Multi-Cap funds are ideal for investors who seek stable and balanced diversification with a rule-based approach. 'Flexi-Cap funds are more suitable for those who want dynamic allocation based on market trends," he said. In summary: Multi-Cap = Stable, rule-based allocation across all caps Flexi-Cap = Dynamic, market-driven flexibility
