Mutual Funds with the Lowest Expense Ratio: Which are the Top Funds to Invest in?
Mutual Funds with the Lowest Expense Ratio: An Overview
Money is a very important part of any individual’s life. Everyone is chasing money and is trying to work as much as possible to earn it. But, only a few can see the other side of money, i.e., the saving part. While the majority of people work effectively to earn money, there are people who work efficiently and earn more, by saving their costs. This article will share insights about Mutual Funds and their Expense Ratio with you. It will also share the lowest expense ratio mutual funds to help you make a decision on which one to invest in.
What is a Mutual Fund?
In simple words, a mutual fund is a type of organization that collects and pools money from various people/investors, with a common investment purpose, and segregates and invests this pooled amount into various financial assets. These investments can be made in lumpsum amount or the form of a Systematic Investment Plan, also called SIP which is in installments.
These funds are managed by professional fund managers, thereby ensuring that your money is in the right hands and will be invested skillfully for higher returns while minimizing your risks, based on your investment objectives. Along with the above-mentioned benefit of professional fund managers managing the money, there are a few more benefits such as liquidity and diversity.
Mutual Funds are of various types. The majorly known mutual funds are Equity Mutual Funds, Debt Mutual Funds, and Hybrid Mutual funds. Each of them has different features and naturally offers different rates of returns and different rates of risks as the assets are different.
What is the Expense Ratio in Mutual Funds?
Investment in mutual funds is growing at a rapid pace. A lot of people have started to invest money in it and a lot of new Fund Houses are opening to provide mutual funds with less expense ratio.
But what exactly is an Expense Ratio? - One of the biggest benefits of investing in Mutual Funds is that it is managed by professionals with in-depth knowledge of the market. But to offer this service, they charge some amount from the investors as they are taking the help of highly skilled professionals and are getting higher returns because of them. This charge by the Fund Houses is called the Expense Ratio, also known as Management Expense, which is generally between 1-3% of one’s total investment.
The expense ratio is related to the Mutual Fund’s Assets Under Management (AUM). If a firm’s Asset Under Management is bigger, the Management Expense or the Expense Ratio will be lower, and similarly, when the AUM is lower, the Expense Ratio will be higher. Hence, while investing one should also consider the Expense Ratio of the Mutual Fund and try to invest in the lowest expense ratio mutual funds in India, to earn higher net returns. They also have the option to invest in an index fund with the lowest expense ratio, if they want.
How does the Expense Ratio bring a difference to returns?
To answer this question in an easy way, we will take an example. Let’s say there are two people X and Y. They both have Rs.10,000 and want to invest it in mutual funds. X invested in ABC Mutual Fund and Y invested in PQR Mutual Fund (which is amongst the least expense ratio mutual funds. After one year, it was found out that both of their Mutual Funds gave the same return of 10%. But, ABC Mutual Fund charged 2% as the Expense Ratio, and PQR Mutual Fund charged 1% as the Expense Ratio or the Management Expense. So, in this case, Y earned more than X as even though the gross returns were the same, the net returns of Y were higher due to a lower Expense Ratio.
Hence, the expense ratio does bring a lot of difference to returns as even though the difference in expense ratio might not be much, but when it is multiplied by the total amount invested, it brings a lot of difference and can affect one’s gains. For example, in the above case, the difference in gains is just 1%. This might not seem like a lot if someone invests Rs.100. But if someone invests Rs.100 Cr? This 1% will bring a lot of difference to the net returns.
Therefore, it is always suggested to invest one's money in low expense ratio mutual funds, or if possible, in the mutual funds with the lowest expense ratio.
Best Mutual Funds with the Lowest Expense Ratio
There are several mutual funds from various Fund Houses But not all Mutual Funds perform well in the market. Although some might provide less expense ratio mutual funds, our target should be to invest in a top-performing low-expense ratio mutual fund. The following are a few of the top performing low expense ratio mutual funds in India:
This scheme is launched by Kotak Mahindra Mutual Fund. This Mutual Fund has a fund size of ₹89.23 Cr and an Expense Ratio of 0.34% This fund has 94.09% investment in domestic equities, out of which, 58.55% is in large-cap stocks and 8.69% is in mid-cap stocks and 19.7% is in small-cap stocks. With a NAV of ₹20.768, it is suitable for people who are looking to invest money for a minimum of 3 - 4 years and want higher returns and are also comfortable to incur a moderate loss as this mutual fund is highly risky.
This scheme is launched by QuantMutual Fund. This Mutual Fund has a fund size of ₹334.75 Cr and an Expense Ratio of 0.56% This fund has 73.47% investment in domestic equities, out of which, 44.62% is in large-cap stocks and 5.16% is in mid-cap stocks and 16.59% is in small-cap stocks. This fund also invests 8.96% in Debt. The entire 8.96% is invested in Government securities. With a NAV of ₹85.25, it is suitable for investors who want higher returns, while being ready for moderate losses as this mutual fund has a very high Risk-O-Meter.
This scheme is launched by Tata Mutual Fund. This Mutual Fund has a fund size of ₹144.19 Cr and an Expense Ratio of 0.27% This fund is a Dynamic Bond Mutual Fund and 95.87% of the total amount is invested in Debt, out of which 80.64% is invested in government securities, and 15.23% is invested in low-risk securities. Being a debt fund, it is moderately risky and is suitable for investors who want to invest for a longer time with reduced risks. It has a NAV of ₹38.1082, and a 5-star Crisil Rank holding in the previous quarter.
* Please Note: The above-mentioned Mutual Funds might not be the perfect fit for all as everyone’s investment purpose, risk appetite, and time horizon of investment are different.
To invest in a Mutual Fund, one should not only consider the expense ratio but also factors such as Net Asset Value (NAV), historical returns, Asset Management Company (AMC), Asset Under Management, exit load, and fund manager’s experience. These factors affect the performance of the Mutual Fund as well. Remember that you need to focus on increasing your gross returns as well; the expense ratio will just help to increase your net returns. Hence, focusing on gross returns is also equally important, if not more.
Therefore, one should not invest in a Mutual Fund or Index Fund only because it is the mutual fund with the lowest expense ratio or the index fund with the lowest expense ratio. One should conduct proper research and invest after considering their investment objective, risk appetite, and time horizon of investment, to make the best decision and earn the highest returns while minimizing the risks.
Do I have control over the Expense Ratio?
No, you do not have any control over the Expense Ratio that the Fund House wants to charge, although, you have control over which Mutual Fund to invest in. Hence, it is suggested to check the Expense Ratio along with other factors before selecting the Mutual Fund to invest your hard-earned money in.
Are there any other costs other than the Expense Ratio?
Yes, there are costs such as entry load, exit Load, security transaction cost, and taxes that need to be paid other than the expense ratio and can affect the net returns that you earned from a Mutual Fund investment.
Which Expense Ratio is the best?
There is no such best expense ratio, although the ideal expense ratio for efficient and higher net returns should be between 0.5% to 0.75% to make sure that the fund is being actively managed by professional Fund Managers.