A Beginner's Guide to Understanding Expense Ratios and NFOs of Mutual Funds

 Mutual funds are one of the most popular investment avenues for many investors in India. They offer the benefit of professional management of one's investments along with diversification across various asset classes. However, while mutual funds seem simple on the surface, there are some key terms that every investor must understand before investing. Two such important terms are expense ratio and NFO (New Fund Offer). This article provides a beginner's guide to understanding these concepts.

The expense ratio refers to the annual fee charged by the fund house to manage the mutual fund scheme. This fee is expressed as a percentage of the assets under management. For example, if a scheme has an expense ratio of 1.5%, it means that the fund house deducts 1.5% every year from the scheme's assets to cover its management expenses. A higher expense ratio eats into an investor's returns while a lower one benefits the investor. SEBI has capped expense ratios based on the type of scheme. What is expense ratio in mutual funds Typically, equity funds have higher expense ratios than debt funds.


New Fund Offer refers to when a new mutual fund scheme is launched by a fund house and units are issued to investors for the first time. New Fund Offers allow investors to enter a scheme at its launch price, which is generally Rs 10 per unit. Investing in a New Fund Offer comes with both pros and cons. On the positive side, investors can enter a scheme early. However, on the flip side, there is no past track record or performance of the scheme to assess. 


Here are some tips for beginners to navigate expense ratios and New Fund Offers:

  • Compare expense ratios of similar schemes before investing. Opt for the lower expense ratio scheme.

  • Debt funds and index funds generally have lower expense ratios compared to actively managed equity funds.

  • Consider investing in New Fund Offer only if you have confidence in the fund manager's ability based on their past track record. Avoid investing in too many New Fund Offers.

  • Review the scheme objective, underlying portfolio composition and intended benchmark before investing in a New Fund Offer to assess if it aligns with your goals.

  • Don't get swayed by fancy New Fund Offer offers alone. Invest based on the scheme's merits.

  • Invest only a small portion of your overall portfolio in an untested New Fund Offer scheme.

  • Opt for the direct plan over the regular plan to save on commissions charged to distributors.

By understanding expense ratios and carefully evaluating New Fund Offers, beginners can make informed mutual fund investment decisions. Maintaining a balanced approach towards New Fund Offers while seeking lower expense ratio schemes can lead to a fruitful mutual fund investment journey.

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