Mutual Fund Fees and Charges

Mutual funds are gaining popularity as one of the best investment vehicles mainly due to their ability to deliver attractive returns to the investor in comparison to other conventional investment methods. Also, since they are managed by professionals with expertise in the mutual funds domain, investors can be assured that their investments are handled effectively to yield optimal returns.

If you are a novice in the mutual funds space but wish to reap the benefits of mutual funds, there are certain things that you should be aware of, the most important one being the charges associated with investing. Let us look at the charges that are levied by the Asset Management Companies (AMCs) or fund houses which the investors need to incur.

Why do fund houses charge investors?

As mentioned above, mutual funds are managed by professionals who are known as fund managers. These fund managers work for the fund houses and apart from the fund managers, there is a team of capital market experts and financial analysts who work collectively to manage the investments. Managing huge investments on a daily basis requires a rich industry experience, expertise in the subject, and a considerable amount of passion. Hence, for this task, the AMC charges a well-earned fee to the investors and these charges are approved by the Securities and Exchange Board of India (SEBI).

The fees include costs such as advisory fees, operational costs, investment management fees, registrar and transfer agent fees, legal and audit fees, agent/ sales commissions, ongoing service charges, etc. All the expenses involved in the management of mutual funds are together known as the total expense ratio (TER) and in simple terms, it is the fee charged by a particular mutual fund scheme to manage the investments on behalf of the investor. The expense ratio is charged annually and its major components are management fees, administrative costs, and distribution fees. It is expressed as a percentage and the reporting of the NAV (Net Asset Value) is done after the deduction all the expenses. As per the guidelines laid down by SEBI, an increase in the Assets Under Management (AUM) should lower the TER and vice-versa.

How is the Total Expense Ratio calculated?

Total Expense Ratio of a mutual fund can be calculated using the following formula – TER = Total expense incurred in an accounting period X 100 / Total net assets of the fund.

SEBI has placed a limit on TER of Debt schemes and Equity schemes, which are as follows:

Average Weekly Net Assets Limit Applicable on Equity Schemes (in %) Limit Applicable on Debt Schemes (in %)
First Rs. 100 Crores 2.50% 2.25%
Subsequent Rs. 300 Crores 2.25% 2%
Subsequent Rs. 300 Crores 2% 1.75%
On the balance assets 1.75% 1.50%

Though regulated by SEBI, the expense ratio of mutual funds may vary according to the size of the fund’s net assets in the following manner:

Size of Fund Expense Ratio Computation Expense Ratio
Mutual Fund with Net Assets worth Rs. 1000 Crores Rs. 20.50/ 1000 Crores 2.05%
Mutual Fund with Net Assets worth Rs. 100 Crores Rs. 2.50/100 Crores 2.50%

The Asset Management Companies can charge an additional 30 bps of Total Expense Ratio if the recent inflows from cities other than that listed as the top 15 reach up to 15% of the scheme’s Assets Under Management (AUM) or 30% of the gross inflows in the mutual fund scheme. The highest value is taken into consideration. This means that, if the TER limit on equity schemes are 2.5% there are chances of it going up to 2.8%.

On the other hand, any additional TER charged will be reduced if inflows from cities other than that listed as the top 15 is redeemed within a year from the investment date.

What are the other charges associated with mutual fund investments?

Mutual Fund Loads

Mutual fund loads are the one-time charges levied at the time of investing in a mutual fund scheme or at the time of exiting a mutual fund scheme. The charges applicable are as follows:

Entry Load – This is charged at the time of investing in a mutual fund scheme. This amount is deducted from the fund’s Net Asset Value (NAV). Different fund houses charge different entry load fees. Generally, the charges are 2.25% of the investment value. However, as per a recent regulation by the SEBI, fund houses can no longer charge an entry load.

Exit Load – When an investor exits from a mutual fund scheme within a short span of holding the same, an exit load has to be paid. This fee is levied in order to discourage investors from opting out of the scheme and to reduce the number of withdrawals. Different fund houses charge different entry load fees, depending on a predetermined holding period.

Entry loads and exit loads help to compensate the distribution costs.

Transaction Charges – A nominal amount has to be paid by investors as transaction fees. This is a fee which is charged only once during an investment. A transaction fee of Rs. 150 for new investors and Rs. 100 for existing investors, can be charged on investments worth Rs. 10,000 and above. For SIP investments, an amount of Rs.100 will be charged as a transaction fee. This fee will be charged only if the SIP commitment is over Rs.10,000 or above. For investments below Rs.10,000, no transaction fee will be levied. Transaction charges are paid to intermediaries or distributors selling the fund.

Other Costs – There are some indirect costs incurred by investors during the investment tenure. This includes charges related to opening a demat account, maintaining the demat account, brokerage charges, etc. While buying and selling stocks, a security transaction tax is levied which has to be paid by investors.

Disclaimer

Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.

GST rate of 18% applicable for all financial services effective July 1, 2017.

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