What is Mutual Fund and Its Expense Ratio? | Investment Ideas by APDaga

What is Mutual Fund and Its Expense Ratio? | Investment Ideas by APDaga
When it comes to investing... 
You all might have heard about Mutual Funds.

Do you know... 
  • What is a Mutual fund? 
  • Why investing through Mutual Fund is safer for a beginner?  
  • What is the Expense Ratio? 
Let understand it by simple real-life example...

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Whenever you fall sick, you have 2 options to improve your health.

  1. Do it yourself:

You start studying about the illness. Do read books, do research, take proper medicines and treat yourself. But you will require too much time, effort, knowledge & patience doing it.
If you are not comfortable doing it then there comes another option.

  1. Go to Professional Doctor:

When you are sick. You go to the doctor, ask him to treat you. Since he is professional in his field. he will use his knowledge and treat you and will improve your health. In exchange for his service, you have to pay his fees to do your treatment.
In most cases, people will opt for 2nd option only. because doing your own treatment is kind of risky and resource-consuming as well.

Similarly, When we talk about investments. Let's assume you have some amount with you. and you are thinking of investing it somewhere.

Here, again you have 2 options (just like the above example).

  1. Do it yourself:

You start to study about all the investment options, research the companies' performance, choose well stocks and invest in them and get good results.
But, this option is time-consuming and you have to put too much effort into it. and If you don't have enough time for doing research and tracking companies' performance. then this option will be a little bit riskier. So, to overcome all the above challenges, here comes 2nd option.

  1. Hire a Professional:

Go to professional. In this scenario, the professional person will be the fund manager. You will get his help for investment. He will use his knowledge and invest your money in some group of stocks (which are good performers) and will generate a good return for you. and he will charge you some fees for his service.

This whole, the process of investing in stocks through the fund manager is known as MUTUAL FUND investment. and the fee charged by the fund manager is called EXPENSE RATIO of the mutual fund scheme.

More Expense Ratio means more the fees of the fund manager to manage your fund. Less Expense Ration means the fee of the fund manager is less.

but you don't have to worry about paying the expense ratio explicitly. because the expense ratio (i.e. fund manager's fees) is already adjusted (included) in the NAV of the mutual fund scheme.

  • As you never choose the doctor only because his fee is less. just like that never choose the mutual fund scheme only looking at the Expense Ratio. There are many more factors you should keep into consideration while choosing Mutual Fund Scheme.
  • But, When it comes to index funds, the Fund manager is not putting much effort into selecting stocks. He will directly invest your amount in the top 30 companies (for Sensex plan) and top 50 companies (for nifty plan). In that case, Expense Ration plays an important role. If you are looking at 2 index funds with all other factors the same (i.e. stocks in those schemes are the same) then choose the mutual fund with a lower expense ratio.

If you have any doubt about investing, feel free to drop it in the comment box below. I will try my best to help you and smoothen your investment journey. 

Thank you,
Akshay P Daga
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