Consider a client who compares a Large Cap fund with a 1.2% expense ratio to a newer, smaller fund with a 2.0% ratio, expressing concern that the higher cost is eroding their returns.
As an MFD, your role is to explain that the Net Asset Value (NAV) your client sees daily is already net of these expenses, meaning the cost isn’t an extra fee they pay out of pocket, but a factor that has already tempered the growth of the unit price.
If you fail to communicate this, the client may incorrectly perceive that they are being charged separately or that the fund manager is taking a hidden cut during their periodic statement review.
Calculation of the NAV is a daily mechanical process where the fund house aggregates the market value of the underlying securities, adds accrued income, and subtracts the Total Expense Ratio (TER) and liabilities. For an investor, this means that if two funds hold identical stocks and perform exactly the same before costs, the fund with the higher expense ratio will naturally show a lower NAV over time.
When you select a scheme for a client, you are essentially evaluating whether the potential alpha—the excess return generated by the manager’s skill—is sufficient to justify the expense ratio relative to the fund’s category peer group.
While some investors fixate exclusively on the lower cost of direct plans, your value as an MFD lies in distinguishing between a fund that is merely ‘cheap’ and one that offers robust risk-adjusted performance after accounting for its expenses. Many clients appreciate that the regular plan, which includes your commission, covers the service of continuous suitability assessment, behavioral coaching during market drawdowns, and help with tax documentation.
A high expense ratio is a red flag only if it is not accompanied by consistent performance or if the manager has consistently failed to beat the benchmark index over a three-to-five-year period.
Remember that the NAV is a trailing indicator of the fund’s efficiency rather than a predictor of future movement. When discussing scheme selection, guide your client to look at the ’net’ outcome of the investment rather than getting lost in the granular details of how much was deducted daily. By framing the expense ratio as the cost of management and advisory support, you shift the conversation from a price-based argument to one of value-based partnership.
Nuance
Check Your Understanding
An investor notices that the NAV of their mutual fund scheme dropped slightly more than the benchmark index on a day where no major trades occurred. What is the most likely reason for this discrepancy?
If a mutual fund scheme has an AUM of INR 500 Crores and an annual expense ratio of 1.5%, how is this cost reflected in the daily NAV calculation?
This is a companion read for Section 9.2 — New Fund Offer Price/On-going Offer Price for subscription from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.
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