Mutual Funds: Costs for Investing

l FA potential investor in mutual funds must take into account the various charges in order to keep a tab on the exact returns expected in the long run. There are two types of charges levied while investing in mutual funds: one-time and recurring charges.

One-time charges

Entry load is the charges levied by an asset management company (AMC) when an investor purchases a mutual fund. Before August 2009, this was a one-time charge, which varied with each fund house. Currently, the guidelines of the market regulator Securities and Exchange Board of India (Sebi) mandate that fund houses cannot charge an entry load.

Exit load is a charge levied by the AMC when an investor sells off their units before a stipulated time. This is also a one-time charge, which is charged according to pre-defined holding period cut-offs. The exit load is usually 1% of the redemption value depending on the exit timeline specified by the AMC.

Transaction charges are a one-time direct nominal charge collected by the AMC if the investment is Rs10,000 and above. However, in case the investment amount is less than Rs10,000, then there is no investment charge. For a new investor and an existing investor, the investment charges are Rs 150 and Rs 100 respectively. In the case of a systematic investment plan (SIP), if the total investment is more than Rs 10,000, a transaction charge of Rs 100 would be payable in four equal installments.

Recurring charges (ongoing expenses)

The expense ratio is the annual fee, which is expressed as a percentage of a fund’s daily net asset value (NAV). The charges that AMC can incur are fund management fees, marketing or selling expenses, audit charges, registrar fees, trustee fees, and custodian fees. Among these charges, fund management fees and marketing or selling expenses could be charged by the AMC at their own discretion. The other charges are the actual expenses that the AMC will incur as part of fund management services.

The expense ratio of funds differs for every asset class. For example, equity schemes have higher ratios as compared to debt schemes and liquid schemes. 

In addition, a Goods and Services Tax (GST) rate of 18% is applicable for all financial services.

A potential investor must take into consideration the loads and expense ratio as it tends to influence the returns on investments. In addition, the performance of a mutual fund should also be taken into consideration. While a few good performing funds may have higher load charges but they also yield greater returns.

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