A mutual fund investment involves a number of fees and charges. Therefore, it is important for investors and potential to be well-versed with these costs before investing.
Here is what one should know about various mutual fund fees and charges applicable in India:
Entry load is the fee levied on investors when they invest in a mutual fund scheme for the first time. This fee covers the distribution costs borne by the asset management company for promoting an MF scheme.
Before the year 2009, this fee varied with each fund house in India. However, according to the current SEBI regulations, fund houses cannot charge an entry load from their investors.
When investors exit a mutual fund scheme within a specific period from the date of purchase, an exit load is levied on these individuals. AMCs impose an exit load on investors to discourage them from opting out of a mutual fund scheme prematurely. Moreover, this fee allows fund houses to reduce the volume of withdrawals.
Generally, fund houses charge an exit load of around 1% on redemption value. It is common for the fund houses to charge exit load if you as an investor redeem the units within a year. While there is no exit load is charged post one year of investment in the same scheme.
This charge is levied on an individual only once during his/her investment. A transaction fee of Rs. 100 to Rs. 150 may be applicable for investments worth Rs. 10,000 and above. Likewise, this fee is also charged on SIP investments that are worth over Rs. 10,000. Needless to say, investments worth less than Rs. 10,000 do not involve a transaction fee.
This charge is synonymous with mutual fund fees and charges for most investors. Expense ratio is an annual fee, which is expressed as a percentage of a fund’s daily net assets. It is charged by an asset management company for managing an MF scheme. Therefore, it covers all the costs of managing and running a mutual fund scheme. Such costs include sales and marketing expenses, administration fees, distribution fees, fund manager’s fees, etc.
The expense ratio is calculated by evaluating a scheme’s total expense incurred and dividing this figure by an AMC’s total assets under management (AUM).
On that note, we must underline that the expense ratio is always higher for regular plans of mutual fund schemes than their direct plans. The reasons for this difference are discussed in the next section.
When an individual invests in a regular mutual fund scheme, he/she invests through an intermediary. Here, an intermediary can be a distributor, agent, or broker.
The fund house needs to pay a commission to these intermediaries. And such results in a higher expense ratio compared to the same direct plan.
As per the SEBI guidelines, the total expense ratio (TER) for an asset management company or fund house should be within certain limits.
|AUM of a mutual fund scheme||Maximum TER for equity-oriented MF schemes||Maximum TER for other schemes (excluding fund of funds, ETFs, and index funds)|
|More than Rs. 50,000 crore||1.05%||0.80%|
|Between Rs. 10,000 crore and Rs. 50,000 crore||TER reduces by 0.05% for every increase of Rs. 5,000 crore in AUM.||TER reduces by 0.05% for every increase of Rs. 5,000 crore in AUM.|
|Between Rs. 5,000 crore and Rs. 10,000 crore||1.50%||1.25%|
|Between Rs. 2,000 crore and Rs. 5,000 crore||1.60%||1.35%|
|Between Rs. 750 crore and Rs. 2,000 crore||1.75%||1.50%|
|Between Rs. 500 crore and Rs. 750 crore||2.00%||1.75%|
|Up to Rs. 500 crore||2.25%||2.00%|
Furthermore, SEBI permits fund houses to levy an additional 30 basis points or 0.30% over and above the mentioned limits for selling in cities beyond the top 30 cities of India. This is to increase the penetration of mutual fund investments in tier 2 and tier 3 cities in India.
Before investing in a mutual fund scheme, individuals must make sure to be aware of the mutual fund fees and charges. You should ideally go through the consolidated account statement or CAS to check the details of the mutual fund holdings.