What are the different types of charges applicable while investing in mutual funds?

Here is a guide to the different mutual fund charges

Mutual Fund Brokerage Charge

In earlier times, investments in India were limited to land, gold and bank deposits. However, with the progressive liberalisation of the economy, the Indian financial sector has grown phenomenally. As a result, stock or shares, despite risks, became everyone's favourite as the best return-giver.

Mutual funds made their way into the market gradually as a financial product. Soon it earned investors' confidence as a reliable investment option. It is estimated that as on September 2022, the asset under management (AUM) of mutual funds in India is a whopping Rs 38.4 Lakh Crores.

The professional expertise of fund managers is the primary reason for the investors' confidence in mutual funds. In addition, portfolio diversification, flexibility, and liquidity offer added benefits.

However, some charges are associated with mutual fund investments, like mutual fund brokerage charges, mutual fund fees, etc. These transaction charges are calculated as a percentage of the invested amount. Let us explore the various mutual fund charges.

What are the different types of charges in mutual funds?

A team of financial analysts and stock market experts (as fund managers) manage the investments under an Asset Management Company (AMC). There are two categories of professional charges:

  • A] One-Time Charges. 
  1. Entry Load: Fees investors need to pay when purchasing the fund units.
  2. Exit Load: When an investor redeems the fund units within the lock-in period, a fee ranging from 0.25% to 1%, depending on the scheme, is levied by the AMC. However, exit load is not applicable beyond the lock-in period.
  • B] Recurring Charges

The fees an investor has to pay for maintaining the portfolio are known as recurring charges or periodic fees. Such fees are levied on a daily, quarterly or annual basis depending on the specific terms of the fund. Some of the standard recurring charges are: 

  1. Management Fee:  Charges for compensating the fund manager for the services rendered.
  2. Account Fee: This is a non-regular fee, and some AMCs may have a minimum balance clause; if investors fail to maintain the minimum balance clause, a pre-agreed expense is deducted.
  3. Switch Cost: Some AMCs allow switching between funds. Investors can switch plans, partially or in full, as per their choice for better gains by paying the Switch price.
  4. Service and Distribution Fee: the AMC charges investors for marketing, promotion and communication of their respective plans.

What is an Expense Ratio?

The expense ratio, typically, is a maintenance fee investors have to pay for their fund portfolio. The ratio is applied as a percentage of assets and is payable to the fund managers by the investors. The AMC uses the Total Expense Ratio formula to calculate the expense ratio per investor. You can find more details.

How is the Total Expense ratio defined?

As mentioned, the total of all charges is considered a percentage of the fund's daily net asset value and is defined as the Total Expense ratio (TER). All mutual funds have to follow the SEBI guidelines on the TER limit. Fund documents provide the necessary details.

Illustrations

If a fund with a TER of 2% declares a 10% dividend, the investors' net return will be 8%.
Suppose a fund collects Rs20 Lakhs in assets and Rs 30000 against various charges from the investors; then the fund's expense ratio is 1.5%.
Understanding mutual fund charges help in assessing your investment returns. But, it is best to remember that several other parameters, like the returns over different periods etc., should be considered before investing in a fund.

In earlier times, investments in India were limited to land, gold and bank deposits. However, with the progressive liberalisation of the economy, the Indian financial sector has grown phenomenally. As a result, stock or shares, despite risks, became everyone's favourite as the best return-giver.

Mutual funds made their way into the market gradually as a financial product. Soon it earned investors' confidence as a reliable investment option. It is estimated that as on September 2022, the asset under management (AUM) of mutual funds in India is a whopping Rs 38.4 Lakh Crores.

The professional expertise of fund managers is the primary reason for the investors' confidence in mutual funds. In addition, portfolio diversification, flexibility, and liquidity offer added benefits.

However, some charges are associated with mutual fund investments, like mutual fund brokerage charges, mutual fund fees, etc. These transaction charges are calculated as a percentage of the invested amount. Let us explore the various mutual fund charges.

What are the different types of charges in mutual funds?

A team of financial analysts and stock market experts (as fund managers) manage the investments under an Asset Management Company (AMC). There are two categories of professional charges:

  • A] One-Time Charges. 
  1. Entry Load: Fees investors need to pay when purchasing the fund units.
  2. Exit Load: When an investor redeems the fund units within the lock-in period, a fee ranging from 0.25% to 1%, depending on the scheme, is levied by the AMC. However, exit load is not applicable beyond the lock-in period.
  • B] Recurring Charges

The fees an investor has to pay for maintaining the portfolio are known as recurring charges or periodic fees. Such fees are levied on a daily, quarterly or annual basis depending on the specific terms of the fund. Some of the standard recurring charges are: 

  1. Management Fee:  Charges for compensating the fund manager for the services rendered.
  2. Account Fee: This is a non-regular fee, and some AMCs may have a minimum balance clause; if investors fail to maintain the minimum balance clause, a pre-agreed expense is deducted.
  3. Switch Cost: Some AMCs allow switching between funds. Investors can switch plans, partially or in full, as per their choice for better gains by paying the Switch price.
  4. Service and Distribution Fee: the AMC charges investors for marketing, promotion and communication of their respective plans.

What is an Expense Ratio?

The expense ratio, typically, is a maintenance fee investors have to pay for their fund portfolio. The ratio is applied as a percentage of assets and is payable to the fund managers by the investors. The AMC uses the Total Expense Ratio formula to calculate the expense ratio per investor. You can find more details.

How is the Total Expense ratio defined?

As mentioned, the total of all charges is considered a percentage of the fund's daily net asset value and is defined as the Total Expense ratio (TER). All mutual funds have to follow the SEBI guidelines on the TER limit. Fund documents provide the necessary details.

Illustrations

If a fund with a TER of 2% declares a 10% dividend, the investors' net return will be 8%.
Suppose a fund collects Rs20 Lakhs in assets and Rs 30000 against various charges from the investors; then the fund's expense ratio is 1.5%.
Understanding mutual fund charges help in assessing your investment returns. But, it is best to remember that several other parameters, like the returns over different periods etc., should be considered before investing in a fund.

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