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The main benefit of investing in mutual funds is that you get professional and expert money management by the fund house. For this, they charge a fee that takes care of their compensation as well as the other investment-related expenses. We have covered the following in this article:

  1. What are mutual fund charges?
  2. What is an expense ratio?
  3. Types of mutual fund charges
  4. How to calculate mutual fund charges or expense ratio
  5. How does expense ratio differ for direct & regular plans?
  6. 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. 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.

b. Load

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%.

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