Time and again, we’ve told you that expense ratios are one of the key ingredients for a debt fund. All things being equal, a higher expense ratio nibbles away at your mutual fund scheme’s returns, especially the debt funds, since here the returns are typically subdued. But are things really equal? Do expense ratios really matter? And should you invest in a debt fund, just because of low expense ratio?
Our findings
Broadly—and very broadly speaking—low expense ratios typically result in higher fund returns, especially in debt funds. All equity funds are allowed to charge a maximum of 2.5% total expense ratio (TER) and all debt funds a TER of 2.25%. Over and above this, the capital market regulator, Securities and Exchange Board of India (Sebi) allows all funds to charge 30 basis points more as an incentive to penetrate in smaller towns and an additional 20 basis points as exit load charges.
To keep things simple here, we took only ultra short-term bond funds (53 schemes, as per Value Research) and short-term bond fund (43) categories. We left out liquid funds because there is very little retail money there. And we left out long-term bond funds because given that their ideal minimum investment tenure is 3 years, one or two good calls taken by the fund managers can negate the impact of high expense ratios in the long run. It’s only in the ultra short-term and short-term bond fund categories that the expense ratios can make a difference.
