It is critical for you to understand the fees associated with mutual fund investing as an investor. When your money is handled by a team of experts, stocks are bought and sold on your behalf, frequent investment communication is delivered, fees are paid to intermediaries, and so on, and all of these costs are incurred.
There are no free lunches in this world. So, what is the maximum amount a mutual fund can charge? Is it a one-time event in nature or a recurrent occurrence?
Charges can be divided into two categories:
One Timer Charges
Entry load, as the name implies, is the amount or cost charged to an investor when he or she enters a mutual fund scheme or joins the company as an investor. Typically, an entry load is collected to pay the company’s distribution costs. As an entry load, different mutual fund companies charge varying costs.
SEBI, on the other hand, has eliminated all entry loads in order to provide transparency in the payment of fees to fund distributors and to encourage long-term investment. Thus, no entry load is applicable on investment in mutual funds in India.
An exit load is a fee levied by mutual fund houses if investors partially or completely exit a mutual fund scheme within a stipulated length of time from the date of investment, as stated in the Scheme Information Document. However, there are certain mutual fund schemes where no exit load is charged to the investors.
Exit loads are charged by mutual funds to deter investors from redeeming their shares before a set amount of time has passed. An exit load is charged to preserve the financial interests of all scheme investors, particularly those who have remained invested.
As an exit load, different mutual fund houses impose varying fees for different schemes. If you are looking to invest in a mutual fund scheme for the short term, you should be aware of the scheme’s exit load structure so that you can make an informed judgment.
Transaction fees are one-time fees that apply when money is invested in a mutual fund scheme. SEBI has issued regulations for mutual funds in its circular no. CIR/IMD/DF/13/2011, dated August 22, 2011. One of the rules concerned transaction fees for investments sourced by distributors.
Transaction Charges (TC) for investments found through Distributors:
A fund house is only authorized to charge Rs. 150/-as TC to new investors (i.e., investors who invest for the first time in said mutual fund scheme), when the transaction / SIP commitment value is Rs. 10,000/-or higher.
The relevant TC will be Rs. 100/- if the transaction is from an existing investor in the scheme.
A TC of Rs. 100/- is charged in four equal tranches, beginning with the second instalment and ending with the fifth installment, for systematic investments (SIP only), if the total commitment to SIP is for Rs.10000/- or more.
The subscription amount, transaction fees, and net investment should appear clearly on the unit holder’s statement of account.
Total Expense Ratio
The expenses are deducted from the mutual fund’s daily net assets. The SEBI regularly prescribes the rates, and Mutual Funds are not allowed to charge more than the set structure. Every day, expenses are taken from the fund’s Net Assets, and the NAV declared is after the expenses have been adjusted. Such recurring expenses are more popularly known as an “Expense Ratio”.
An expense ratio (ER), sometimes also referred to as a management expense ratio (MER), determines how much of a fund’s assets are utilized for administrative and other operating costs.
Despite the fact that the expense ratio structure is defined by the regulator, it changes depending on the size of the assets under management. Higher net assets equal a lower expense ratio, while lower net assets equal a higher expense ratio. This, in turn, has an effect on the returns earned by the mutual fund. In the case of liquid funds, the expenditure ratio difference would be one consideration.
Before investing in a mutual fund, investors must make sure that they are well aware of all fees and charges associated with a mutual fund scheme. A scheme charging a lower TER and exit load will be more beneficial for an investor. However, these fees and charges should not be the only criteria for selecting a mutual fund for investment.