1. Mutual Fund Charges
Where there is a mutual fund, there is an Asset Management Company (AMC). And where there is an AMC, there is a fund manager. A fund manager is supported by a team of financial analysts and market experts in the backdrop. Managing such a massive amount daily while striving to overcome market risks is no mean feat. It needs subject expertise, industry experience and a fair amount of passion. Therefore, the mutual fund company charges a SEBI-approved for their services.
2. Expense Ratio
Sometimes, the expense ratio is synonymous with mutual fund charges. And at other times, there could be other investment expenses too, which investors need to pay.
Expense ratio or the fee to the fund house from individual investors is what motivates an asset manager to deliver stellar returns. The more they deliver to their investors, the reputation of the AMC and fund manager increases. Hence, investors’ satisfaction is their ultimate goal. One happy customer means not only steady investments in future but also more investors. This is capable of increasing the assets under management (AUM). All of this comes at operational costs. Now, let’s explore various mutual fund charges and their relevance to investors.
3. Types of mutual fund charges
An investor usually incurs two types of charges – One-Time Charge and Recurring Charge. However, there are many variations to them as given below.
a. One Time Charge
One-time charges are those that incur during the initial period for the investment. It’s basically buy-in tariff, taking poker table as an example. It’s also referred to as a transaction charge.
A load is basically a commission or fee. AMCs or intermediaries usually collect it before you invest or after. Sometimes, redemption charges or early withdrawal charges are also levied on investors. You must be familiar with the entry load and exit load of a mutual fund.
c. Entry Load
When an investor has to pay a nominal charge when he purchases a fund unit, it is called an entry load. Not all funds levy this. SEBI deferred this in August 2009 for mutual funds alone.
d. Exit Load
This is a fee levied on investors when they decide to redeem their mutual fund units. The rate for this is not fixed.
Exit load is variable and falls in the range of 0.25% to 4%, depending on the scheme. The fund houses decide this fee, mainly to make people stay in for a certain period called the ‘lock-in period’. No exit charges apply if you redeem your units after the lock-in period. For instance, say, if a fund is priced at Rs.500 and the investor is looking to redeem within the lock-in period, then he has to pay an exit load of Rs.5 for every unit he redeems if the exit load is 1%.
.e. Recurring Charge
This is the fee which the investor pays on a daily, quarterly, or annual basis. Recurring fee is generally charged for maintaining the portfolio, advising, marketing, and other expenses. It is also referred to as the periodic fee.
f. Management Fee
The management fee is an expense charged for paying the fund manager for his services and the management of the investment. This does not come under other expenses.
g. Account Fee
Some AMCs charge investors for maintaining their account if they do not meet the minimum balance criteria. They deduct this expense from the portfolio of the investor.
h. Distribution and Service Fee
This fee is charged from investors for the marketing, printing, and mailing of the AMC, which keeps the investor informed via different marketing campaigns. It also provides the fund manager with adequate funds.
h. Switch Price
Some funds allow switching between mutual funds. So, a person can switch from Scheme X to Scheme Y at a price called Switch Price. Depending upon the scheme, the investment can be wholly or partially transferred.
4. How to calculate Expense Ratio
Fund houses use the TER formula to finalise expense ratio per investor. TER or Total Expense Ratio is what you get when you divide the total expense incurred in an accounting period X 100 by the fund’s total net assets.
5. Difference in mutual fund charges for direct and regular plans
Every mutual fund comes in two variants. They can directly approach the AMC or buy through an intermediary. It is cost-efficient to invest in direct funds, that is, buying directly from the AMC. This is because you are exempt from the potential commission you indirectly pay to an agent or distributor. However, understanding the market trends and how a specific fund can meet your goals require plenty of research and market expertise and this where an intermediary plays a critical role.
It is better to approach a qualified intermediary for guidance if you are not market savvy. Plans bought this way are regular funds. They can be the same fund. However, availing professional expertise means you will have to pay a commission to the distributor. This becomes part of the overall expense ratio and pushes it higher. Regular plans come with a host of benefits like instant and one-time KYC and convenience.
6. SEBI guidelines for mutual fund charges
SEBI has mandated a TER limit on all equity and debt funds as given in the table below.
Average Net Assets Per Week
Limit for Equity Schemes
Limit for Debt Schemes
|Up to Rs.100 Cr||2.5%||2.25%|
|Rs.100 to Rs.300 Cr||2.25%||2%|
|Rs.300 to Rs.600 Cr||2%||1.75%|
|On the balance assets||1.75%||1.50%|
In a nutshell, expense ratio should be a critical metric which investors should consider before investing.