June 06 , 2012
This is the fee you pay the mutual fund, for managing your money for you. It gets deducted on a daily basis, so you typically don't see this happening. Expense ratio is charged for covering fund management and operational expenses such as marketing and distribution, R&TA fee, audit fee etc.
Debt mutual funds and index funds have lower expense ratios than diversified equity funds. Equity funds involve more management, so their expense ratios tend to be higher than debt ones. And a part of this goes to pay commissions to the broker through whom you invested. So if you expect him to give you good service, you are well justified – after all he is making regular income from your investment.
Expense ratios change often. They are disclosed every six months. Long term investors must pay close attention while choosing funds in same category with similar returns since a high expense ratio will significantly erode the earnings due to the effect of compounding over the long term.