All Mutual funds come with some charges that are levied on the investors as a fee for management of the fund money for investment in various equity and debt assets. It includes the marketing and transactional costs associated with regular sale and purchase of the stocks or other instruments.
An investor must be acquainted with these costs and relevant terms so as to make a better investment choice. These costs are deducted from the final amount that an investor receives after redeeming a plan.
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What are the Mutual Fund Costs?
In the following sections, we will discuss some of the key mutual fund investment costs that you should keep in mind when investing in any scheme.
Entry Load in Mutual Funds
Entry Load refers to mutual fund charges paid by investors when they ‘enter into a mutual fund scheme‘ for the first time. This is designed to cover the distribution expenses borne by the fund house while promoting a mutual fund scheme.
Earlier entry load in India used to be around 2.25% of the value of the investment. But in 2009, the market regulator SEBI (Securities and Exchange Board of India) abolished entry loads for all types of mutual funds in India. Thus, at present, investors in India need not pay any entry load while investing in any mutual fund scheme.
Exit Load in Mutual Funds
Exit Load is one of the key mutual fund charges of a scheme. It is paid by an investor at the time of redeeming the mutual fund units. This charge is put in place in order to discourage investors from exiting the scheme. Exit loads are not mandatory for mutual fund investments. However, if a fund house wants to, it can charge an exit load up to the maximum limit of 7%.
Exit load tends to vary from one scheme to another. Some fund houses charge a flat exit load whereas others charge it on the basis of holding period – lower exit load for the investments that are held for a longer period and higher exit load for the investments that are held for a relatively shorter duration.
As per SEBI guidelines, a fund house is allowed to charge a maximum exit load of 7% of the redemption amount. However, fund houses generally charge an exit load of 1% on redemption value to keep the schemes attractive.
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This is by far the most important of mutual fund charges that you need to keep in mind. Expense Ratio is expressed as a percentage figure and refers to the annual fee charged by a fund house for the management of a mutual fund scheme.
Expense ratio is calculated by dividing the total expenses incurred in the management of a scheme by the total AUM (assets under management) of the scheme. The total expenses of a fund include costs borne by a fund house for administration, marketing, distribution and promotion of a scheme.
Mutual fund expense ratio also includes compliance cost and shareholder service cost of the scheme. Some mutual funds also include charges for selling off the units while some don’t. Usually, the funds that involve a third party for the sale of units have sale charges which are paid as commission to these intermediaries. These funds are known as Load Funds and have higher Expense Ratio than No-Load Funds in which the investment company bids the units itself.
Why is Expense Ratio Higher for Regular Plans?
The regular plan of a mutual fund scheme always features a higher expense ratio than its direct plan counterpart because when you invest in a regular mutual fund scheme, you invest through an intermediary such as a broker, distributor or agent.
In such cases, the fund house pays a commission to the intermediary which is deducted out of your investment amount. While these costs are also associated with direct plans, the applicable charges tend to be much lower. Thus, it is always beneficial (as you get higher returns) to invest in the direct plan of a mutual fund scheme.
You can invest in a direct mutual fund scheme through Paisabazaar.com which enables you to invest in the direct variant of a mutual fund scheme without charging any commission.
Mutual Fund Charges: Maximum Expense Ratio Limits
As per capital market regulator SEBI, fund houses can charge a Total Expense Ratio (TER) subject to the following maximum limits:
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|Assets Under Management of Scheme (crores)||TER for equity-oriented schemes (%)||TER for other schemes excluding Index Funds, ETFs and Fund of Funds (%)|
|Rs. 10,000-50,000||For every increase of 5,000 crore in AUM TER reduces by 0.05%||For every increase of 5,000 crore in AUM TER reduces by 0.05%|
|> Rs. 50,000||1.05||0.80|
However, SEBI allows fund houses to charge an extra 30 basis points (0.30%) in expense ratio over and above the above mentioned maximum limits for selling in town and cities beyond India’s top 30 cities. This benefit is available to fund houses only if 30% or more of new inflows into the scheme are obtained from beyond the top 30 cities. The aim of this discretion is to widen the penetration of mutual funds in tier 2 and tier 3 cities.
Mutual fund costs including expense ratio are deducted from the returns earned by a mutual fund scheme and adversely impact investor gains. Thus, the returns which an investor earns on his/her mutual fund investment is the residual and final return, i.e. it is the return adjusted for various mutual fund charges including the expense ratio.
Does CAS include Mutual Fund Charges?
Consolidated Account Statement (CAS) as the name suggests is a statement that keeps all the transactions of mutual fund investment of an investor consolidated at one place of a particular period. It shows details of sale, purchase and all other details such as NAV, NAV date, etc. of all the mutual fund holdings in an orderly manner.
SEBI has directed all the AMCs to declare all kinds of charges and fees given to the distributors in absolute terms against the investors’ total investments in half yearly CAS. Average Total Expense Ratio (in percentage) for applicable plan of each scheme (Regular or Direct), gross commission figures including the costs incurred by distributors such as service tax, operating expenses and any other payments made in form of sponsorships/events, trips, gifts or rewards are to be mentioned in the CAS.
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How do AMCs compute Consolidated Account Statements?
National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), that work for National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) respectively have details of all kinds of transactions done through an investor’s demat account or mutual funds. These details are shared by the AMC on the basis of which CAS is computed. Other platforms like CAMS, SBFS also give access to the investors to have a consolidated view of their holdings in an email statement through the PAN option.