Asset Management Companies charge certain fees on the mutual fund schemes held by the investors and this contributes to the overall mutual fund expenses incurred by him/her. Mutual Fund Houses manage the mutual fund portfolio, monitor market fluctuations and make investment decisions. For this service offered to manage funds professionally and to meet 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 expenses related to mutual funds are together called Total Expense Ratio or TER. Total Expense Ratio is the annual expense incurred on the mutual fund held by an investor. AUM or Assets Under Management should always be higher than the Total Expense Ratio (TER), as stipulated by SEBI (Securities and Exchange Board of India).
Calculation of Total Expense Ratio
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 %)|
|1st 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%|
Expense Ratio Computation
|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 reaches 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 is a chance of this 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. Mutual Fund Loads
Mutual Fund Loads are charges applicable on the mutual fund investments. These are 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 Net Asset Value (NAV). Different fund houses charge different entry load fees. Generally, the charges are 2.25% of the investment value. SEBI has made it mandatory that an entry load is no longer charged by fund houses and this practice has been discontinued.
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. AMCs can charge new a transaction fee of Rs. 150 for new investors and Rs. 100 for existing investors, on investments worth Rs. 10,000 and above. However, if the investment is worth less than Rs. 10,000, then transaction fees are not levied.
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 withdrawal. 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.
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.
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.