Investors should avoid MFs with high expense ratios: All you need to know

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Avoid paying a high expense ratio in categories where the scope for generating high outperformance doesn't exist

  • Former Sebi chief U K Sinha recently said that India's mutual fund industry is among the most expensive globally and there is scope for bringing down costs
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  • The bottomline, according to experts, is that a high expense ratio is justified only in products that manage to generate high alpha
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  • Actively-managed equity funds in India have traditionally generated high alpha
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  • But in recent years the alpha generated in the large-cap equity segment has shrunk
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  • Either fund houses will have to reduce expense ratios in their large-cap funds (as Edelweiss AMC has done), or investors may shift to passively managed funds
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  • In the debt category, returns are anyway low, so investors should avoid funds with high expense ratios
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  • Going direct is one way investors can reduce cost. The benefit ranges from 41-65 per cent across categories