April 2023 

One day, Mohan, a new client, walked into my office and proudly declared, "I have invested in tax-saving mutual funds! Aren't you proud of me?"

I replied, "Well, that's great news, Mohan! But can you tell me what the expense ratio of the fund is?"

Mohan looked at me with a blank stare and said, "Uh, what's that?"

I explained to him that the expense ratio is the annual fee that the mutual fund charges its investors for managing the fund's assets. It's an essential factor to consider because it directly impacts the investor's returns.

Mohan scratched his head and said, "Oh, I had no idea about that! But it's okay, right? I mean, tax-saving funds are always a good investment!"

I couldn't help but chuckle at his innocence and replied, "Well, Mohan, there are a lot of things you need to consider before investing in any fund. The expense ratio is just one of them. But don't worry, I'm here to help you make informed investment decisions."

Mohan looked relieved and said, "Oh, thank you! I thought I had it all figured out. I guess I should consult you before making any bigger investments!"

We both laughed, and I assured Mohan that I would always be there to guide him through the confusing world of investments. From that day on, Mohan became one of my most loyal clients, and we both had a good laugh about his initial naivety regarding mutual fund investments.

One of the biggest mistakes made by many investors is neglecting the importance of the expense ratio while investing in funds.

Hear is a table below to show you the annualized returns for an investment of 1 lakh rupees per year (i.e., annuity payment) over a 20-year period for four funds with expense ratios of 1%, 2%, 3%, and 4%, assuming a gross return of 15% per annum. Here is the table: