Every mutual fund house incurs expenses. Fund managers need to be paid their salaries for managing investors’ money. Distributors need to be paid commissions for selling mutual fund schemes. Apart from these, there are several costs incurred in running a fund house such as auditor’s fees, registrar and transfer agent’s fees and so on. Who’ll pay for all this? The investor, of course. Hence, the rules allow mutual fund schemes to deduct some portion from your investments to pay for these expenses; whatever remains belongs to investors. But there is a limit to which the fund houses can charge investors. Equity funds are allowed to charge up to 2.5% of the assets that a scheme manages (apart from something extra to incentivise penetration in smaller towns); debt funds’ expenses are capped at 2.25%. As the size of the fund grows, expenses are mandated to come down. Hence, typically, a larger fund will have low expenses and vice-versa, though this is not always the case.
Here is a list of actively managed equity schemes with the lowest expenses. We have ignored passively-managed funds like index funds and exchange-traded funds because these funds’ expenses are capped at 1.5% and competition has already driven their expenses down significantly.
Ideally, the lower the expense, the better it is for your fund as expenses reduce the fund returns to that extent. But a low expense ratio is just one of the many parameters that investors should look at before investing in a mutual fund scheme. Still, it pays to know how much your fund is charging and which are the ones that charge the lowest fees.