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The concept of mutual fund is advantageous in many ways when you compare it to more traditional modes of investing. And the primary benefit is the professional and expert money management by the fund house. For this, they charge a fee (with or without different categorizations. In this article, we will explore mutual fund charges in detail.

  1. What are mutual fund charges?
  2. Types of mutual fund charges
  3. How to calculate mutual fund charges or expense ratio
  4. How does expense ratio differ for direct & regular plans?
  5. SEBI guidelines for expense ratio

 
 

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 with a team of financial analysts and market experts in the backdrop for managing the same. Managing such a huge amount on a daily basis 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, but well earned fee for their services.

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 more reputed the AMC and fund manager will be. So, investor’s satisfaction is their ultimate goal. One happy customer not only means steady investments in future, but also more investors, thereby increasing the assets under management (AUM). All of this comes at an operational costs. Now, let’s explore various mutual fund charges and their relevance to investors.

 
 

2. 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 which occur during the initial period for starting investing. It’s basically buy-in tariff taking poker table as an example. It’s also referred as transaction charge.

b. Load

Load is basically commission or fee. The AMC or intermediary usually collects it before you make the investment or after. Sometimes redemption charges or early withdrawal can also be charged. You must be familiar with entry load and exit load of 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 charge which is levied on an investor when he decides to redeem units of his mutual fund. The rate for this is not fixed. It is variable and falls in the range of 0.25% to 4%, depending upon the scheme. The respective fund house decides this fee, mainly to make people stay in the lock-in period. If you are selling after the lock-in period, there are no exit charges usually. For instance, say, if a fund is priced at Rs. 500 and the investor is looking to sell. Then, he has to pay an exit charge of say 1%. So, for every share he sells, he must pay an exit charge of Rs. 5.

e. Recurring Charge

These is fees which the investor has to pay on a daily/quarterly/annual basis. It’s basically charged for maintaining the portfolio, advising, marketing and other expenses. It is also referred as Periodic fees.

f. Management Fee

Management fee is an expense coined for paying your Fund Manager for his services and the management. 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 from the portfolio of the investor.

h. Distribution and Service Fee

This basically is an expense for an investor for the marketing, printing, mailing of the AMC which keeps the investor informed via different marketing campaigns. This also provides the fund manager with adequate funds, if the AMC is cutting close corners.

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, investment can be wholly or partially transferred.

 
 

3. How to calculate Expense Ratio

Fund houses uses the TER formula to finalize 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.

Fund Size

Expense Ratio Calculation

Expense Ratio

Fund with Net Assets worth Rs. 1000 Crores Rs. 20.50/ 1000 Crores 2.05%
Fund with Net Assets worth Rs. 100 Crores Rs. 2.50 for every 100 Crores 2.50%

 
 

4. Difference in mutual fund charges for direct and regular plans

Investors have two options to buy a plan. They can either approach the AMC directly or buy one through an intermediary. It is cost-efficient to invest in direct funds, that is, buy directly. This is because you are exempt from potential commission you might have to shell out to an agent or distributor. However, understanding the market, trends and how a specific fund can meet your goals is not everyone’s cup of tea.

It is better to approach a qualified intermediary for guidance, if you are not market savvy. Such plans are regular funds. They can be the same fund. But since you’re availing professional expertise, the distributor charge you a commission, which gets added to the overall expense ratio. Regular plans come with a host of benefits like instant and one-time KYC and convenience. This is the reason for the difference in the fee.

 
 

5. 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%
100 to 300 Cr 2.25% 2%
300 to 600 Cr 2% 1.75%
On the balance assets 1.75% 1.50%

 

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