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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

Two equity funds have the same category and similar portfolios. Fund A has a Total Expense Ratio of 1.0% for its Direct plan and Fund B has a TER of 2.0% for its Regular plan. If both earn a gross return of 12% before expenses, what is the approximate difference in net return, ignoring any distributor-related effects other than TER?

The difference is about 1 percentage point in favour of Fund A. Net return is roughly gross return minus TER, giving 11% for Fund A and 10% for Fund B, so the lower-cost fund delivers the higher return.

  1. A1 percentage point, in favour of Fund ACorrect
  2. B2 percentage points, in favour of Fund A
  3. C1 percentage point, in favour of Fund B
  4. DNo difference, since TER is already included in NAV

Explanation

Net return is about gross return minus TER: Fund A 12% - 1% = 11%, Fund B 12% - 2% = 10%. The difference is 1 percentage point favouring A. The last option is wrong because, although NAV is net of TER, the higher TER still reduces the return.

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