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What are the charges involved in mutual fund investing?

As an investor, it is very important to know what are the charges involved in investing in mutual funds. When your money is handled by a team of experts - stocks are bought and sold on your behalf, periodical communication is sent on investments, charges are given to the intermediaries etc and all these expenses come with a cost.

There are no free lunches. So the question is how much a mutual fund can charge? Is it one time in nature or regular?

There are broadly two types of charges:

1.   One time charges:

Entry Load: The charges that are levied when the units are being purchased. The mutual fund would sell the unit price higher than the NAV. At present Mutual Funds cannot charge entry load.

Exit Load: The mutual fund would buy back the units at rate lower than the NAV. There are no fixed exit loads which are charged. It varies based on the scheme. The current practice is the funds could charge any way from 0.50% to 3.00% depending on the holding period. If the investors continue to hold the investment beyond the specified period, no exit load is charged.

For ex: An equity fund currently at an NAV of Rs. 72/- per unit charges exit load of 1% if the investor exits within 1 year of investment. If an investor wants to sell his mutual fund units, which were bought 7 months back the redemption NAV for such investor would be Rs.71.20/-

Current NAV

72

Exit load 1% of NAV

0.72

Redemption NAV

71.28

If the investor has sold 1000 units, the total exit load applicable would be Rs. 720/-. A Mutual Fund cannot use these charges for paying commission or meeting any of their expenses. This Rs. 720/ should be invested back to the fund, which would benefit the investors who remain invested for long term.

As per this illustration if the investor redeems after 1 year, there is no exit load.

Transaction Charges: These charges are one time charges applicable when the money is invested. This is applicable for the investments of over Rs. 10,000/-. This would be paid to the distributor/intermediary who is selling the fund.

New Investor to Mutual fund

Rs. 150/-

Existing Mutual Fund Investor

Rs. 100/-

SIP Investments

Rs. 100/-

The transaction charges of Rs. 100/- is charged for the SIP commitment of Rs. 10,000/- or above (not monthly SIP amount). The SIP transaction charges are deducted over 4 installments starting from 2nd installment to 5th installment.

2.  Recurring Charges (Ongoing expenses/Fund Running Expenses):

The expenses are charged on Daily Net Assets of the specific mutual fund. The guideline rates are given by the regulator and Mutual Funds cannot charge more than the stipulated structure. The expenses are deducted every day from the Net Assets of the fund and NAV declared is after adjusting the expenses.

The SEBI limit on TER is as follows:

Daily Net Assets

Equity Funds

Debt Funds

First Rs. 100 Cr

2.50%

2.25%

Next Rs. 300 Cr

2.25%

2.00%

Next Rs. 300 Cr

2.00%

1.75%

Over and above Rs. 700 Cr

1.75%

1.50%

 The above given rate are per annum and the expenses are calculated on daily basis

0.30% of Total Expenses Ratio could be charged on the fund if 30% of the fresh inflows are from cities beyond Top 15 cities in India

Does the expense ratio vary between funds?

There are twocategory of diversified equity funds offered by different mutual fund companies. Fund A has a total size of Rs. 1000crs and Fund B has a total size of Rs. 100/- cr. Does it make the difference in-terms of the total expenses charged by the fund?

Fund A:  Expense structure of a Fund with Net Assets of Rs. 1000 Cr

First Rs. 100 Cr

2.5% of   Rs. 100 Cr

Rs. 2.50 Cr

Next Rs. 300 Cr

2.25% of Rs. 300 Cr

Rs. 6.75 Cr

Next Rs. 300 Cr

2% of Rs. 300 Cr

Rs. 6.00 Cr

Over and above Rs. 700 Cr

1.75% on the balance Rs. 300 Cr

Rs. 5.25 Cr

Total Expenses

Rs. 20.50 Cr

 

Fund B: Expense structure of a fund with Net Assets of Rs. 100 Cr

First Rs. 100 Cr

2.5% of   Rs. 100 Cr

Rs. 2.50 Cr

Total Expenses

 

Rs. 2.50 Cr

Even though the expense ratio structure is stipulated by the regulator, it varies based on the size of the net assets of the fund. Higher the net assets, lower expense ratio and lower the net assets higher the expense ratio.This in turn impacts the returns generated by the respective mutual fund. In-case of funds like Liquid funds, the difference in expense ratio would be one factor

Fund Size

Expense ratio computation

Expense Ratio

Fund with Rs. 1000 Cr Net assets

Rs. 20.50/1000 Cr

2.05%

Fund with Rs. 100 Cr Net assets

Rs. 2.50/100 Cr

2.50%

The above example is only for illustration purposes.

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Mutual fund investments are subject to market risks, read all scheme related documents carefully.