Mutual Fund Charges

Gaurav Chakraborty
Gaurav Chakraborty
gauravc@orowealth.com

The number of Mutual Funds enthusiast is on the rise. These funds are professionally managed and can be started off with a small contribution of Rs. 500.  And more importantly, one can choose a fund as per his/her own needs. But as it’s said, there are no free lunches. If you want to enjoy something, you need to pay for it.

Read on to understand the various charges that are associated with mutual fund investments.

  • Transaction Charges

Transaction Charges are one-time expenses and are paid to the intermediary who sells the fund. Hence, it is applicable only when the mutual fund investment is done through a distributor or any such intermediary. Individuals who directly buy the fund units from the AMC do not need to pay this charge. Some direct mutual funds platforms also do not levy this charge.

The following guidelines are applicable in the case of transaction charges:

  • The value of the investment should be more than Rs. 10,000.
  • For investors opting for SIP mode, the total commitment should be above Rs. 10,000. The transaction charges are deducted in four equal parts (starting from the second installment to the fifth installment)
  • The amount is fixed by SEBI
    • First-time mutual fund investors – Rs. 150
    • Subsequent investments –Rs. 100
  • Load

Load refers to a fee or a commission. It is collected by the fund house or the intermediary at the time of making the investment or at the time of withdrawal.

  • Exit Load

This fee is charged at the time of exiting from a mutual fund scheme. The main objective behind levying this fee is to encourage investors to stay invested in the fund (at least till the lock-in period) and discourage investors from making frequent withdrawals. Exit load become applicable only when the investor leaves the scheme before completion of the holding or lock-in period.

It is expressed in the form of a percentage and varies across AMCs. It is calculated on the Net Asset Value (NAV) applicable on the day of the transaction.

For example, if the exit load value is 2% and the current NAV is Rs. 500, then the investor needs to pay a load of Rs. 10 for every unit sold.  Hence, his net earnings from each unit is Rs 490.

  • Entry Load

Entry Load refers to the charge that an investor has to pay at the time of buying a fund unit. This practice was scrapped in 2009 as per the SEBI guidelines. At present AMCs cannot levy this charge.

  • Fund Running Expenses

These expenses are ongoing in nature. They need to be paid to the Asset Management Company on a periodic basis. The guidelines regarding these expenses are determined by SEBI. Fund houses need to mandatorily follow these guidelines and are not allowed to charge anything above the stipulated rates.

Fund running expenses are also known as recurring expenses or periodic charges. These expenses are levied as a percentage of the average AUM (Assets under Management) of the concerned fund’s scheme. It is also referred to as the Total Expense Ratio or TER. In simple words, it is the charge levied by the Fund House to manage the investor’s portfolio. It includes operational expenses, administrative costs, legal and advisory charges, service fees, commissions etc. Mutual fund houses also incentivize the distributors through additional commission for expanding the fund penetration beyond the cities. This also impacts the Net Asset Value(NAV) for the investor.

 

Average Net Assets (Weekly)Limit % for Equity SchemesLimit % for Debt Schemes
First Rs. 100 Crores2.5%2.25%
Next Rs. 300 Crores2.25%2%
Next Rs. 300 Crores2%1.75%
Balance1.75%1.5%

 

The expense ratio of all mutual fund is a product of the fund’s size and its exposure to equity. Usually, there is an inverse relationship between this ratio and the growth in the size of the fund. The expense ratio should come down with the increase in the fund’s size due to economies of scale.

This ratio has a direct bearing on the return from the fund. The Fund House deducts this expense and then declares the Net Asset Value(NAV). Hence, a higher expense ratio indicates a higher charge on the fund’s assets and lower returns. This is an important factor to consider while selecting a mutual fund.

For example, there are two funds which have delivered 11 percent returns in the last three years. When making a choice between these two funds, one should not go solely by the return percentage. A difference in the expense ratio can make all the difference.

If the expense ratio is 1.5 percent and 2 percent for the funds, then the net return (after adjusting for expenses) is 9.5 percent and 9 percent. Hence, it is better to choose the fund with a lower TER.

We hope with this information you will make an informed choice while investing in mutual funds.

Gaurav Chakraborty
Gaurav Chakraborty
gauravc@orowealth.com

Gaurav is an engineer-turned-digital marketeer. Also a personal finance blogger with experience in financial planning and crowdfunding sector. He is a part of the Marketing team at Oro.

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