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. 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.
2. Expense Ratio
Sometimes, expense ratio is synonymous with mutual fund charges. And at other times, there could be other investment expenses too, which you 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 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. This can increase 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.
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 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.
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.
Exit load is variable and falls in the range of 0.25% to 4%, based on the scheme. The respective fund house decides this fee, mainly to make people stay in the lock-in period. No exit charge applies, if you sell your shares after the lock-in period. 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. It 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.
4. 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.
Expense Ratio Calculation
|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%|
5. 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 require plenty of research and market expertise.
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%|
|100 to 300 Cr||2.25%||2%|
|300 to 600 Cr||2%||1.75%|
|On the balance assets||1.75%||1.50%|
In a nutshell, expense ratio should be a key metric you as an investor should consider before investing.