hen opting for mutual funds, investors always look at the Net Asset Value.

This is the price of a fund's unit and indicates the returns the fund has given over a period of time.

But investors tend to ignore the expense ratio. This figure covers all other administration and fund management expenses.

It is an important indicator since it can take away a significant chunk of the returns.

• What returns must I look at when selecting a fund?

How the expense ratio works

A fund can charge a maximum of 2.5% of its total assets (money and investments under its management) as the expense ratio. This percentage has been fixed by the Securities and Exchange Board of India.

Funds calculate this amount on a daily basis as a percentage of their Net Asset Value.

So let's say a fund is managing Rs 250 crore (Rs 2.5 billion) today. It can charge a maximum of 2.5% of Rs 250 crore (Rs 2.5 billion) as fund expenses.

The next day, Rs 250 crore (Rs 2.5 billion) is worth Rs 260 crore (Rs 2.6 billion). The fund can now charge a maximum of 2.5% on Rs 260 crore (Rs 2.6 billion).

Similarly, if it falls to Rs 200 crore (Rs 2 billion), it is 2.5% on this amount.

Sahara Mutual Fund has come out with a tilt to this in its Wealth Plus Fund.

The Wealth Plus Fund will have a variable fee structure based on the fund's performance.

The total 2.5% has been split into two components.

The fixed component is 1.5%. These charges will be necessary to maintain the fund and include all administrative costs.

The balance 1% will be the variable factor. It will be charged to investors only when the fund performs.

• Should you invest in FMPs?

How does one judge a fund's performance?

To measure a fund's performance, it must take a benchmark index and monitor its progress against it.

The Wealth Plus Fund has opted for the S&P CNX 500 index as a benchmark

Here is how the fee structure will be decided:

NPR = Net Portfolio Return (the return the portfolio has given over a period of time).

BR = Benchmark Return (the return the index has given over a period of time).

The calculation will be shown daily on the fund's web site for investors to take a look.

• What your fund agent will not tell you

The portfolio

Another interesting factor about this fund is the stocks it plans to invest in. This is a diversified equity fund that will invest in the shares of various companies in different sectors.

The companies will be selected based on the Return on Equity.

ROE is a measure of a corporation's profitability. It is the return a company gets on total shares. It is calculated as net income/ shareholder's equity.

The ROE is useful to compare the profitability of a company with other firms in the same industry. It reveals how much profit a company generates with the money that shareholders have invested in the company.

The mutual fund identifies companies for investment whose three-year average ROE is at least twice the annualised yield for five-year Government of India securities [Get Quote] as on the close of the previous financial year.

The reason a three-year average is taken is because companies that do not show consistency in earnings will be avoided. So, though a company may post a higher ROE in one year than others, it will be avoided if it displays volatility.

Consistent and steady returns are the criteria. Hence, the three-year average and not one-year ROE.

Also, the company must have a market capitalisation of at least Rs 100 crore (Rs 1 billion). Market cap is the number of shares multiplied by the share price.

• Why mid-caps are hot!

Fees

Most fund houses do not charge an entry load at the Initial Public Offering.

A fund IPO is when a new fund is launched and is open to collect the initial investment amount.

In this case, an entry load is levied. This is a fee you pay when buying units of a fund. It is a percentage of the NAV, which is Rs 10. All retail investors investing less than Rs 1 crore (Rs 10 million) will have to pay an entry load of 2.25%.

The good news is that there is no exit load. Because now you pay a fee only on Rs 10. When the NAV increases (which it hopefully should), you will not be paying a load (fee) on the higher NAV.

The Wealth Plus fund seems determined to put its money where its mouth is.

So if you are thinking of investing in equity, take a look at this fund. It will open for initial subscription from July 4 to 22.