Mutual fund investments are advantageous in many ways in comparison to traditional modes of investing. The most obvious advantage it offers is the professional and expert money management by the fund house that is not possible for an individual to do on his own. However, these services do not come for free and the cost of these services is expensed to the investor and is reflected in the NAV. For an investor, therefore, it is important to know the expenses he/she will have to bear when investing in a mutual fund scheme.
Expenses do vary from fund to fund and typically range from 0.5-3%. The bigger the size of the fund, the lower the expenses are. Some of the standard charges that are applicable to mutual fund investments are:
Types of mutual fund charges:
There are broadly two types of charges applicable to mutual funds:
One Time Charge
Transaction Charges: One time charges, also referred to as transaction charge (TC), are those which occur at the time of investment. These charges are incurred if the investment is made through a mutual fund distributor or intermediary as opposed to directly investing into the funds. As per SEBI guidelines, an Asset Management Company (AMC) can deduct transaction charge of Rs 150 (for a first time investor across mutual funds) or Rs 100 (for investor other than first time mutual fund investor) per purchase / subscription of Rs 10,000 and above, which are deductible from the purchase / subscription amount and payable to the distributor. Transaction charges in case of investments through SIP are deductible only if the total commitment of investment (i.e. amount per SIP instalment x No. of instalments) amounts to Rs 10,000 or more. In such cases, transaction charges shall be deducted in 3‐4 instalments.
Entry Load: These charges are levied when the units are purchased. However, as per SEBI norms, this practice has now been discontinued and mutual funds can’t charge entry load.
Exit Load: This is a charge, which is levied on an investor at the time of redemption and is not fixed for all funds. It varies across the funds and falls in the range of 0.50% to 3%, depending upon the scheme. This fee is mainly charged to make people stay invested for the lock-in period and in most cases selling after the lock-in period has no exit charges. For instance, say, if a fund’s NAV is priced at Rs 100 and the investor is looking to sell, then he has to pay an exit charge of, say, 1%. So, for every unit he sells, he must pay an exit charge of Re 1. For example, HDFC Small Cap Fund (G) charges an exit load of 1% if units are redeemed on or before the expiry of 1 year from the date of allotment and nil after one year. SBI Dynamic Bond Fund charges exit load of 0.25% if redeemed within one month from the date of allotment. ICICI Prudential Bond Fund charges exit load of 1% if units are redeemed on or before the expiry of 1 year from the date of allotment.
The expenses are charged on Daily Net Assets of the specific mutual funds based on Total Expense Ratio (TER). The guideline rates are given by the regulator and mutual funds cannot charge more than the stipulated structure. However, even though the expense ratio structure is stipulated by the regulator, it varies based on the size of the net assets of the fund. The higher the net assets, the lower expense ratio is and the lower the net assets, the higher the expense ratio is. As with increase in the size of AUM net expenses do not increase proportionately, thus the ratio of expenses normally decreases with higher asset size. This in turn impacts the returns generated by the respective mutual fund. It is imperative to note that the net assets of the fund and NAV declared are after adjusting the expenses.
Further, the NAV of the fund is calculated on a daily basis. What you see in the Mutual Fund NAV is thus what you will get, both at the time of purchase and redemption.
For example, Franklin India Income Opportunities Fund (Direct Plan) has a 0.84% Base TER* and Regular Plan has a 1.56% Base TER on Jun 27’ 2018. SBI Large & Midcap Fund (Direct) has a 1.29% Total TER and Regular Plan has a 2.27% Total TER as on 26 Jun 2018.