Fees and Charges for Mutual Fund Investments

Mutual funds are managed by qualified fund managers, supported by a team of market experts and financial analysts from the fund house. Fund managers charge a certain fee for the below-mentioned reasons:

1. Expertise Required: Managing large-scale investments daily requires deep industry knowledge, experience, and dedication.

1. Management Fees: Asset Management Companies (AMCs) charge investors a justified fee for managing funds, which is regulated and approved by SEBI.

1. Included Costs: These fees cover various expenses, such as advisory and management charges, operational costs, legal and audit services, agent commissions, and ongoing service fees.

Maximum Expense Ratio Limit

According to SEBI guidelines, the Total Expense Ratio (TER) for an asset management company or fund house must adhere to specific limits:

Additionally, SEBI allows fund houses to impose an extra 30 basis points or 0.30% above the specified limits for sales in cities beyond the top 30 cities of India. This aims to enhance the reach of mutual fund investments in tier 2 and tier 3 cities in India.

Before venturing into a mutual fund scheme, individuals should ensure they are well informed about the fees and charges associated with mutual funds. Ideally, one should review the Consolidated Account Statement (CAS) to examine the particulars of the mutual fund holdings.

SEBI Guidelines on Mutual Fund Charges

As per the SEBI guidelines, the basis points (bps) were introduced to express in percentage, i.e., 1/100th of 1%. SEBI also mandates expense ratio limits for equity and debt funds. The maximum limit of Toral Expense Ratio (TER) is mentioned in the table below:

How is the Total Expense Ratio Calculated?

Total Expense Ratio of a mutual fund can be calculated using the following formula:

TER = Total expense incurred in an accounting period X 100 / Total net assets of the fund.

Costs Associated with Mutual Fund Investments

The expenses associated with mutual fund investments are mentioned below:

One-time charges: Fees charges to the investors once during the first time investment which is levied on purchase or redemption of units in mutual funds.

Recurring charges: Recurring charges in mutual funds are ongoing fees deducted from assets to cover management and operational costs, reflected annually in the fund's expense ratio.

Management fee: Charges paid to a fund manager or asset management company (AMC) for managing a mutual fund or investment portfolio. These fees compensate the professionals who make investment decisions, monitor performance, and rebalance the portfolio.

Account fee: This is charged to maintain the account which is reimbursed to the investment companies for services, such as recordkeeping, sending account statements, and customer service.

Distribution and service fee: This is also known as the 12b-1 fee that covers the cost related to distributing mutual funds through brokers and marketing cost. The amount is assessed based under the expense ratio which is capped at 1% per annum for equity fund and 0.50% for debt fund.

Switch price: This is charged when investors switch from one fund to another and the amount is based on the percentage of funds switched. The amount gets deducted from the account automatically.

Entry Load Charges in Mutual Funds

1. A fee once charged when investors made their first investment in a mutual fund scheme.

1. Covered distribution and promotion costs incurred by the asset management company (AMC).

1. As per SEBI regulations, no entry load is charged now.

Exit Load Charges in Mutual Funds

1. Charged when investors redeem or exit a mutual fund scheme within a certain time (usually within one year).

1. Aims to discourage premature withdrawals and maintain fund stability.

1. Typically, 1% of the redemption value is charged as exit load.

1. No exit load is applied if units are redeemed after one year.

Transaction Charges

1. A one-time fee applicable on investments of Rs.10,000 or more, including SIPs.

1. It usually ranges between Rs.100 and Rs.1500

1. No transaction fee is charged for investments below Rs.10,000.

1. Some platforms do not charge any transaction fees for mutual fund investments.

Expense Ratio

1. Represents the annual fee charged by the AMC to manage a mutual fund scheme.

1. The expense ratio is expressed as a percentage of the daily net assets of the fund.

1. It covers the costs, such as fund management, administration, distribution, and marketing.

1. Calculated by dividing the fund’s total expenses by its total assets under management (AUM).

Why Do Regular Plans Have a Higher Expense Ratio?

Mutual funds offer direct and regular plans. Direct plans are cost-effective with no commission, offering higher returns and NAVs. While regular plans involve intermediaries, therefore incur extra fees, and have lower asset values, unit prices may appear lower.

Difference in Mutual Fund Charges: Direct vs Regular Plans

The difference between the charges for direct and regular plans of mutual fund:

Disclaimer

Mutual Fund investments will be subject to market risks. Any mutual fund listed in the document does not guarantee fund performance or its underlying creditworthiness. Do read the mutual fund document thoroughly before investing. Specific investment needs and other factors have to be taken into account while designing a mutual fund portfolio.