Mutual Funds Charges & Fees

As an investor, you must be aware of the fees and charges related to mutual fund investment. Understanding these costs before investing helps in taking advantage of the investments and maximizing the profits. Mutual fund investments are a great investment option for creating wealth in the long term. Since the investment is market-linked, mutual funds have the potential to generate higher returns than traditional investment options. Let us read more about mutual fund charges, the structure of mutual funds, how to calculate expense ratio, the maximum expense ratio limit in India, and more in detail. 

What Are the Mutual Charges Associated with Mutual Fund Investments?

Entry Load

When you make your initial investment in a mutual fund, entry fees are charged to cover the distribution cost for the asset management company. Entry load fees varied across different fund houses in India before 2009. With current SEBI regulations, fund houses are forbidden from charging an entry load. This ensures that investors don’t have to pay this fee, reducing the overall investment cost and promoting transparency in mutual fund investment.

Exit Load

When you redeem your investment before the expiration of the specified holding period, a fee is charged called exit load. The primary aim of the exit load is to discourage investors from exiting the scheme before the maturity date. The Asset Management Company (AMC) determines the percentage of exit load charged, which is 1% exit load on the total redemption amount. It is important to understand all mutual fund charge exit loads. It is wise to select a mutual fund with no exit loads, as you will be charged fees for the premature sale of mutual funds.

Transaction Charges

When you purchase and sell units with a total value exceeding a certain limit, you are levied with transaction charges. If the transaction value is more than 10,000, the maximum transaction charge levied is ₹150 from new investors as per the regulations by SEBI. As per the regulations prescribed by the Securities and Exchange Board of India (SEBI), mutual funds can levy a maximum transaction charge of ₹150 from new investors if their transaction value. However, the maximum transaction charge that can levied is restricted to ₹100.

Expense Ratio

The expense ratio is charged by AMCs to cover the expenses related to managing the mutual funds, including mutual fund management fees, administrative costs, distribution and marketing expenses, fund manager’s fees, registrar fees, and custodian charges, among others. It is one of the major charges related to mutual funds, which can significantly affect your investment returns. It is advised to choose a fund with a low expense ratio. Subject to the maximum limit set by SEBI, AMCs have the freedom to levy expense ratios accordingly.

• Management fees: It is paid for managing the investments to the fund manager.
• Administrative costs: It includes costs for record-keeping, customer service, and other operational expenses.
• Marketing and distribution costs: It is used for advertising and selling the fund.

How to calculate the expense ratio?

You can calculate the expense ratio by using the below formula:

Expense Ratio = (Total Expenses / Total Assets) × 100

• Total expenses: the total of all the expenses that are used for running the fund. It includes management fees, administrative expenses, and any other applicable charges.
• Total assets: Determine the total assets under management (AUM) of the fund.

For example, if the total expenses of a mutual fund add up to ₹10 crore and the total assets of the fund are ₹1000 crore, the expense ratio would be:

• Expense Ratio = (Total Expenses / Total Assets) × 100
• Expense Ratio = (10 / 1000) × 100 = 1%
• The expense ratio is 1%.

What is the Maximum Expense Ratio Limit in India?

As specified under regulation 52 of SEBI Mutual Fund Regulations, AMU cannot exceed the maximum expense ratio limits.      

Why Do Regular Plans Have a Higher Expense Ratio?

If you invest in a regular mutual fund scheme, usually it is usually invested through an intermediary such as a distributor, agent, or broker. These intermediaries charge commissions from the fund houses, resulting in a higher expense ratio compared to a direct plan.

• Direct plans: It has a lower expense ratio, no intermediary commissions, and potentially higher returns.
• Regular plans: it has a higher expense ratio due to intermediary commissions, and you can enjoy the benefit of advisory services.

Conclusion
It is important to understand and be aware of the fees and charges, including the expense ratio, exit loads, and SIP charges, related to mutual fund investment. As these fees and charges impact your overall returns. As a smart investor, you can choose the right mutual aligned with your financial goals if you are aware of the costs and calculations associated with it. Further, you can choose direct or regular plans and understand the cost implications and investment returns.