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The importance of low expense ratios in hybrid funds

As a mutual fund investor, everyone has different goals, risk profiles, and investment strategies. Some investors aim for high returns through equity investments, while others prioritise safety through debt funds. But there are investors who prefer a mix of both asset classes, as it balances their portfolio and protects them from volatility. This is where hybrid funds can help.

Hybrid funds are those mutual funds that help investors with diversification by investing in both equity and debt securities. They combine the growth potential of equities and balance the risk with stability of debt securities. But every mutual fund scheme comes with a cost- Total Expense Ratio (TER), a fee mutual funds charge to finance their expenses.

As an investor, you pay this fee as a percentage of your investment, which is deducted from the fund’s returns. So, you must invest in hybrid funds with low expense ratios to bring the maximum value from your investments. Let’s understand more about the importance of low expense ratios in hybrid funds and why it should be a top priority when building your investment portfolio.

  • Low expense ratios can boost your returns

When you invest in mutual funds, you, just like any investor, want to maximise your returns. Lower expense ratios mean higher investment returns for investors. So, more of the returns from the fund reach investors rather than the fund management company.

For example, suppose an investor invests in a hybrid fund with an average 8% annual return rate and a 2.5% expense ratio. The investor will receive a net return of 5.5% after deducting the expense ratio. But, by reducing the expense ratio to 0.5%, there would be a net return of 7.5%. This small difference can result in a huge difference in your total returns over the long term.

  • Low expense ratio helps a fund to maintain consistency in performance

When a hybrid mutual fund has a lower TER, it means there is more capital available to invest. This increases your return potential and helps to create a more profitable portfolio.

For example, let’s say you invest in two hybrid funds with the same underlying assets and allocation strategies but different expense ratios. The fund with lower expense ratio will have more money invested. So, it has chances to generate higher returns over time.

  • High expense ratios impact your long-term goals

You make investments in mutual funds with different goals. No matter if your aim is to create long-term wealth, save for retirement, afford a down payment on a house, or fund a luxurious vacation, your investments need to work hard to yield profitable returns.

High expense ratios can be a big hurdle to achieving your goals. This is because these fees add up over time and reduce your overall returns. If you do not take steps to manage your overall expenses, you could fall short of funds needed to achieve your set goals.

  • Low expense ratios promote growth and compounding

A low expense ratio means the fees charged by the fund company are minimal. So, more of your investment money goes directly into buying assets. The more the fund grows, the more money you will earn in returns, adding to the power of compounding. With higher expense ratios, your returns are reduced, and the amount available for compounding is also lower.

To wrap up

Low expense ratio is important to keep your hybrid mutual fund profitable in the long run. However, just relying on a low TER is not enough to guarantee high returns. Thus, also consider the fund’s track record, consistency in returns, fund manager strategy, and risk-taking approach. Considering these can help you invest in hybrid funds smartly and build a stable long-term portfolio.

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