What are the Components of Expense Ratio

There are lot of components to expense ratio which adds together. These are basically all those expenses which the asset management companies have to incur in order to manage funds. As per regulations by SEBI asset management companies are required to disclose all these expenses to there customers in a period of every six months. Following are the main heads of components which are part of expense ratio:

1. Brokerage Fees: So there are two types of mutual funds one can be Regular and other can be direct. Under regular scheme of mutual funds the asset management companies transact all the funds through a broker and the broker is responsible for all the transactions of invested funds through regular scheme. In order to service the fund management by the broker, AMCs charge brokerage fees from regular scheme investors. However, direct scheme investor do not face this burden of brokerage.

2. Management Fees: The funds are required to be managed by people of great knowledge of investing and generating optimal returns to the investors in order to service the expertise hired to manage funds, AMCs have to compensate the experts, fund managers, and other managerial persons responsible which adds to the expense ratio and this is an important factor for expense ratio.

3. Administrative Cost: AMCs comes under the strict control of regulators, and they have to maintain all the necessary information and details as required by the relevant regulatory and legal requirements. AMCs maintain all the records of there investors, they have to set up customer redressal mechanism, they have to establish regular communication with investors and many more other miscellaneous administrative costs are incurred by the AMCs which adds to the expense ratio.

4. Marketing and Distribution Cost: AMCs hire intermediaries for the promotion and distribution of new mutual funds to new investors which adds to the marketing and distribution cost of AMCs, and this is also termed as 12B-1 fees. AMCs spend a decent amount on advertising and promotion to spread awareness about there new mutual fund products and hence adds to the expense ratio.