To answer why the expense ratio is important? we need to understand the concept of expense ratio better.
Expense ratios mean how much the fund charges in terms of percentage annually to manage your investment portfolio. If you invest Rs. 50,000 in a fund that has an expense ratio of 2%, then it means that you need to pay Rs. 1,000 to manage your money.
But we need to also understand that in mutual funds house there are various types of expenses incurred apart from the expense ratio. They also incurred expenses like legal fees, custodian fees, audit fees, registration fees, and marketing and distribution of the products. These all these expenses are paid by Net asset value (NAVs) are reported after deductions.
How expense ratio varies from plan to plan?
There are different ways to invest in mutual funds like a regular plan or direct plan. The thing is in the regular plan you purchase mutual funds through an intermediary such as an advisor or distributor. And there you have to pay commission, because of that your expense ratio is higher in regular plans.
Does the expense ratio have any impact on returns?
The expense ratio tells us the amount investors have to pay for a certain amount of return. As we discussed in the above example how to invest Rs 50,000 in a fund that has 2% of the expense ratio, you need to spend Rs 1000 to manage that amount of return. Lessor the ratio means more profitability and higher the ratio means less profitability.