One of the benefits of investing in mutual funds is that it avails investors the opportunity of their investments being overseen or professionally managed by fund managers with the expertise for investment research, due diligence analysis and asset selection.

Fund managers are professionals trained in the art and science of investing. Not only do they select the assets or investment types to allocate funds to, they monitor the performances with a view to ensuring that investment goals are achieved.

No free lunch

Where required, fund managers engage in portfolio rebalancing or strategy change to keep the investments in line with anticipated or planned outcome. However, as is generally said, there is no free lunch.

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The professional management of fund by managers comes at a cost. So, to enjoy all that the fund managers have to offer; mutual fund investors have to pay some fees like management fee, audit fee, legal fee, admin fee, custodian fee, etc.

Business day

To know the extent or how much fee fund investors pay, financial experts came up with what is today called expense ratio.

expense ratio formula

Expense ratio is the annual fee that all mutual fund investors are charged by their fund managers. Expense ratio calculates the relationship between the total expenses and the gross asset value of a fund.

Deal book 300 x 250

Because most of the fees are flat fees that do not change in proportion to differences in a fund’s asset value, there is the tendency for small funds to have higher expense ratio than bigger funds.

[ALSO READ: Understanding Mutual Fund Fees: Management Fee]

Expense ratios differ from fund to fund and as such, they are or should be one of the decision variables that investors should factor into the equation before choosing what fund to invest in.

In more advanced markets like those of the USA, it is mandatory for fund managers to disclose the expense ratio of their funds (in the fund fact sheets) but it does not seem to be so in the Nigerian market.

One may argue that fund prospectuses have information on expense ratio and therefore does not need to be disclosed further, but, prospectus expense ratios are what they are, prospective and not actual.

actual expense ratio

Actual expense ratios may change from month to month and therefore should be reported in the monthly fact-sheets, where available.

A search we carried out across fund managers’ websites and documents indicates that information on expense ratio is conspicuously absent in majority of the available fact sheets.

This non-disclosure of expense ratios, among others, flies in the face of and attests to the lack of transparency in mutual fund reporting in Nigeria.

[ALSO READ: Understanding Mutual Fund Fees: Management Fee]

One fund manager that reports on fund expense ratio is FBN Asset Management company. According to available information, FBN Asset Management expense ratio stands at 0.90% as of December 2018.

This means that if you have a mutual fund with FBN Asset Management with a value of say N100,000.00, you will pay between N900 monthly as fund related expense depending on the fund you invest in.

Another fund manager that has been transparent with reporting expense ratio is First City Asset Management Ltd, Managers of Legacy Equity Fund and Legacy Debt Fund, (formerly Legacy Short Maturity Fund) which have expense ratios of 2.64% and 1.83% per annum, respectively.

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Why Expense Ratio information is important

It is important to know what the expense ratio of the fund you are investing in (is) because if you have or are planning on investing in either of two funds that have the same return percentage, expense ratio information can be the dividing line between them.

Note that it is important to compare the expense ratio of funds that own similar investments. It does not help to compare the expense ratio of a money market fund with that of an equity fund, you will be comparing apples and oranges in that case.

Expense ratio is a drag on fund performance such that a fund that delivers a gross return of 11% but has an expanse ratio of 1%, effectively returns 10%, net of fees. Therefore, knowing the expense ratio of your fund gives a better idea of the fund’s net of fee performance.

[ALSO READ: A guide to how Mutual Funds work in Nigeria]

WHERE CAN I FIND EXPANSE RATIO

Where can you find Expense Ratio?

Because expense ratios are not deducted from your account but are deducted from a fund’s total asset before you get your share of the fund, so you may not see it expressed in your investor statement, but they can be found on fund fact-sheets, where available.

If they are not readily available, investors should be able to request for and obtain such information from their fund managers.

There is need for the regulatory authorities to compel fund managers to reveal the expense ratios of their funds on their websites and fact-sheets.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

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