Did you ever think while making a selection for a mutual fund that if the past returns of the fund are good, then it is best to invest in? Let me tell you that’s not right. In this article, we will explain an important factor to be considered in your selection. Also, the best mutual funds considering the factor(Expense Ratio)
As we all know that in long-term, mutual funds give better returns as compared with any other traditional bank schemes based investments.
So the first metric you use to find the best mutual fund for you is”How has been the past returns “. Do we agree with your choice? Not exactly. What you missed in your selection is another important factor other than past return: Expense Ratio. If you miss the expense ratio you are half right!
Let me explain what’s the fuss about
Expense ratio is the amount of money incurred from the investor in the form of the fees or charges to the Asset Management Companies (AMC) to handle your portfolio. This amount charged from you helps the assets companies to run the show: fulfill the salary of the Fund Managers, manage the cost involve in the accounting, legal services or custodian work, auditing fees etc.
Every funds have its own associated expense ratio which differs with the type of the fund. The NAV(Net Asset Value) of the fund is calculated on daily basis after considering the expense ratio. So, the fees or charges are deducted on the daily basis from the total invested sum, not on the profit gain, an important point for investors to note.
So as per the SEBI regulations, the expense ratio on the equity-based mutual funds is 2.50% and for the debt funds it is 2.25% and it is revised on the quarterly basis by the fund if they require to change the percentage of expense.
How to Calculate the Expense Ratio:
It is calculated as the percentage of the Expenses incurred by the AMC over the total fund asset value.
Expense Ratio = Operating Expenses/Average Value of Fund Assets
Let’s take an example as below:
The AMC named as ‘X’ having the total asset value of 10 lakhs managed by them and they require the yearly expense of Rs. 1000 to handle the customers portfolio. So expense ratio is calculated as:
Expense Ratio = 1000/10,00,000 = 0.01(1%)
So, if your fund gives you the yearly return of 12%, the net return is calculated as 12-1 = 11%, it is the final percentage of return you will get in your account.
How Expense Ratio Affects your Mutual Fund Returns?
So, as we have seen in above case that 1% deduction in the form of the expense ratio helps the AMC to carry out their fund management expense. Now if we analyse the overall return included with expense ratio over the period of 20 years is shown as below:
If an investor invest 1,00,000, how the returns are calculated over the period of 20 years:
*The compounded returns calculated as per 12%
Top Mutual Funds based on Expense Ratio:
Below are the lists of the Top mutual funds schemes having the less expense ratio. However, the funds are chosen on the basis of the below parameters-
- Less Expense Ratio
- Consistent Returns
- Good CRISIL Rating
- Beating Benchmarks Returns
Only having the less expense ratio do not suggest that the fund can give more returns as the charges being less, fund itself should be more capable in terms of growth and consistency.
|Top Equity Mutual Funds Category Wise (as on Aug 31, 2018)|
|Mutual Fund Scheme||Category||Direct-Expense Ratio(%)||Regular-Expense Ratio(%)|
|Franklin India Blue chip Fund||Large Cap||1.27||2.03|
|Axis Long Term Equity Fund||Tax Save – ELSS||1.24||2.25|
|HDFC Hybrid Equity Fund||Hybrid/Balanced||0.95||1.95|
|HDFC Mid-Cap Opportunities Fund||Mid Cap||1.08 (as on 30 Sep 2018)||1.98(as on 30 Sep 2018)|
|SBI Small Cap Fund||Small Cap||1.47||2.74|
Franklin India Blue chip Fund –
Franklin India Bluechip Fund, a Large Cap fund which invests mainly in the Large Cap companies. The fund is one of the oldest fund active in the mutual funds’ industry. Since the inception of its Regular type fund in Dec – 1993, gives return around 20% CAGR and direct type fund returns 11.75% CAGR in last 5 years with having the AUM of 7,700 crores as on 30 Sep 2018.
Graph beating its benchmark index NIFTY 100
Axis Long Term Equity Fund
Axis Long Term Equity Fund, a tax saving fund comes in the ELSS Category which invests mainly in the Large Cap companies. This fund is the top performer from last 5 years and continues to grow. Since the inception of the fund in Dec – 2009, the regular type fund returns around 17% CAGR and direct fund types return around 20% CAGR having the AUM of 16,999 crores as on 30 Sep 2018.
Graph beating its benchmark index NIFTY 200
HDFC Hybrid Equity Fund
HDFC Hybrid Equity Fund, a balanced fund having the combination of both equity and debt investment. The fund is also one of the oldest fund active in the mutual funds industry. Since the inception of the Regular fund type in Apr – 2005, return around 15.73% CAGR and direct fund type gives 10.23% CAGR in last 5 years having the AUM of 21,430 crores as on 30 Sep 2018.
Graph beating its benchmark index VR Balanced
As per SEBI, Funds with large AUM should have the least expense Ratio
HDFC Mid-Cap Opportunities Fund
HDFC Hybrid Equity Fund, a mid-cap opportunity fund which invests mainly in the Mid Cap companies. The fund is giving the consistent returns since the inception in Jun – 2007 with approx 15.40% CAGR in Regular type fund and with approx 20% CAGR return in last 5 years with the AUM of 19,532 crores as on 30 Sep 2018.
Graph beating its benchmark index NIFTY Midcap
SBI Small Cap Fund
DSP Small Cap Fund, a small-cap fund which mainly invests in the small-cap industries. The fund is one of the top performers in this category. Since the inception of the fund in Sep – 2009, return around 19% CAGR with regular fund type and with 27.25% CAGR return in last 5 years in terms of the direct fund type. This fund has the AUM of 4,764 crores as on 30 Sep 2018.
Graph beating its benchmark index NIFTY SmallCap
Expense ratio must be considered before buying any mutual fund scheme, it saves your lot of money in the long term. Also, go with the direct funds which always give the more returns as compared to Regular funds.
The above top funds will change over time in terms of performance, this list can also be changed in near future. This is my personal picks in each category in terms of least expense ratio. I do not market these funds or give any financial advice, it’s your take to go with the funds or not.
Financial Freedom Enthusiast
Spend 6 years in learning Stocks & Mutual funds Investment. A traveler from soul, finance is passion, Investment is hobby.