Understanding the Total Expense Ratio of a Mutual Fund

Published: July 28, 2016 at 9:54 am

Last Updated on

Have you ever wondered how the total expense ratio (TER) of a mutual fund is calculated? Or what the constituents of the TER are? The most authentic publically available source for understanding the TER is the annual report released by AMC.

Yesterday, Franklin Templeton announced to its investors that the abridged annual report for 2015-2016 was available for download. While some AMCs release category-wise annual reports, Franklin has a separate file for each fund.

So I got hold of the report for Franklin India Smaller Companies Fund. This fund has always shown a significant difference between direct plan and regular plan returns. For example see: Returns Comparison 2016: Direct Mutual Fund vs. Regular Mutual Fund  or the one made in 2015: Direct Mutual Fund Option: The Second Anniversary Report.

The following images are adapted from the annual report of the fund (page 5).

Mutual-fund-Total-expense-ratio-2
Usually, AAuM refers to the (monthly) average assets under management. It is however not clear what the average here is. The AAuM mentioned in (2) above is the regular plan + direct plan AuM in both dividend and growth plans.

However, the AAuM mentioned in (4 a,b) is the total AUM in either regular plan or direct plan.

The constituents of the total expense ratio are given below. This is for regular and direct combined.

Mutual-fund-Total-expense-ratio-1

Item 2.6 – commissions should be absent in the direct plan.

Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

The regular plan expense ratio of 2.40% matches with the March 2016 fund factsheet. For the direct plan, the fact sheet says it is 1.28% as against 0.92% in the annual report. There are also discrepancies between closing AAuM in the report and that found at AMFI and the factsheet. For now, I will put this down to my own lack of understanding of the manner of reporting.

I have used the monthly AAuM reported at AMFI to understand the breakup of the total expense ratio.

Mutual-fund-Total-expense-ratio-3

There is a discrepancy as expected between the reported and calculated values of the TER. This is due to the difference in AUM or the way in which they are reported. There is nothing alarming about it and I do not wish to read too much into an approximate estimate.

The idea behind this post is to understand what the constituents of the TER are and their weights. Notice how the management fee is much higher in the case of direct plan due to the lack of commissions.

I wish I could get my hands on a set of data that can be consistently accounted for. Guess that will have to wait for now.

In other news:  Check out the four free freefincal ebooks and the site map for navigating all parts of the blog.

 

Do share if you found this useful
Join our 1500+ Facebook Group on Portfolio Management! Losing sleep over the market crash? Don't! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free! Did you miss out on the lockdown discount? You can still avail it! Follow instructions in the above link!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!)

About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

About freefincal & its content policy

Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. We operate in a non-profit manner. All revenue is used only for expenses and for the future growth of the site. Follow us on Google News
Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)

Connect with us on social media

Our Publications


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingThis book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
   

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)  

Free Apps for your Android Phone

Comment Policy

Your thoughts are the driving force behind our work. We welcome criticism and differing opinions.Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

8 Comments

  1. The expenses shown are in percentage. Direct plan is showing higher pecentage of expenses under Management fees , service tax etc due to absence of Agents commission. The % shown seems to be % expenses to total expenses of Direct Plan. There seems to be no discrepency.

  2. Recently I had gone through the fact sheets of SBI MF. there i find that they are paying different dividends to Direct purchase and regular purchase customers. The return on investments are same and satisfactory to me. I think all AUMs should follow this way. Please comment.

  3. 1. How can the “Management Fee” which is basically to manage the Fund/Scheme, be different in case of “Regular” and “Direct” mode. It has to be a % of the AUM with some minimum amount, etc. I am presuming the total AUM under “Direct” category is above the threshold limit for calculating ‘minimum amount’ of AUM.
    2. How can dividend declaration be different for “Regular” and “Direct” as pointed by K.K.Rao. And further intriguing fact is that if an AMC declares different dividend for “Regular” and “Direct” category, how RoI would be the same.
    Seems like some pandora’s box. Some one must take up the matter with SEBI to take up and investigate the matter.

  4. Hi ,
    Few dbouts
    1) In Valuereasarch web site they report ‘Expense’ , is that same as TER ?
    2) Assuming that one has invested 10,00,000 in a Direct MF and Expense is 1% , what will be the total expense he pay in year (though through NAV) ( assuming NAV remain same for the year – for the sake of simplicity)

Comments are closed.