Venita VanCaspel, the first woman member of the Pacific Stock Exchange, once said, “A mutual fund can do for you that you would do for yourself if you had sufficient time, training, and money to diversify.” Embracing this wisdom, mutual funds offer a fuss-free investment gateway, thanks to skilled fund managers, automated SIPs, portfolio diversification, and more. However, while these experts provide their invaluable expertise and management, they come with some costs. Knowing the charges in mutual fund schemes is important to be informed and select a cost-effective option. Find out more about the different types of mutual fund charges.
Types of mutual fund charges
Broadly, there are two types of mutual fund charges:
1. One-time charges:
- Transaction charges: These are charged when you invest inmutual funds for the first time to cover the costs of setting up your account.
- Entry load:Asset Management Companies (AMC) charge a load when investors enter or exit a mutual fund scheme. The entry load was charged when investors made an initial investment. However, in August 2009, the Securities and Exchange Board of India (SEBI) mandated AMCs to discontinue the practice of charging an entry load for any mutual fund scheme.
- Exit load:An exit load is charged when you exit a mutual fund scheme within a specific period from the date of purchase. AMCs primarily charge this to discourage investors from withdrawing their investments prematurely.
2. Recurring charges:
- Expense ratio:The AMC levies the expense ratio to cover the expenses of managing a scheme. The expense ratio is an annual fee representing a percentage of a mutual fund's daily net assets. It is calculated by dividing the total expenses incurred by the scheme by the total Assets under Management (AUM).
The expense ratio covers costs such as sales and marketing, administration, distribution, and management fee. These costs are incurred for specific purposes. The management fee, for example, is charged to pay the fund manager for conducting research, monitoring the fund's performance, and making investment decisions. On the other hand, the distribution and service fee covers the costs associated with marketing, printing, and emails sent to investors concerning information on the mutual fund scheme.
- Account fee:Some AMCs may charge an account fee if you fail to meet the minimum balance requirements.
- Switch price:A switch price is charged when you switch your investment from one mutual fund scheme to another within the same AMC.
Differences in charges in mutual fund schemes for direct and regular plans
A direct plan allows you to invest directly with the mutual fund company without involving intermediaries, such as distributors or agents. In contrast, a regular plan lets you invest with the assistance of a mutual fund distributor or agent.
The key advantage of a direct plan is its lower expense ratio compared to a regular plan since there are no commissions or distribution costs involved in direct schemes.
It is important to stay up to date with SEBI's guidelines on charges associated with mutual funds. Hop on to the next section to know the latest provisions.
SEBI guidelines for mutual fund charges
As of April 1, 2020, the Total Expense Ratio (TER) limit for mutual funds has been revised by SEBI as follows:
AUM | Maximum TER for equity funds
| Maximum TER for debt funds
|
On the first Rs 500 crores | 2.25% | 2.00% |
On the next Rs 250 crores | 2.00% | 1.75% |
On the next Rs 1,250 crores | 1.75% | 1.50% |
On the next Rs 3,000 crores | 1.60% | 1.35% |
On the next Rs 5,000 crores | 1.50% | 1.25% |
On the next Rs 40,000 crores | A reduction of 0.05% for every increase of ₹5,000 crores of daily net assets or part thereof | A reduction of 0.05% for every increase of ₹5,000 crores of daily net assets or part thereof |
Above Rs 50,000 crores | 1.05% | 0.80% |
Additionally, mutual funds have been permitted to charge an additional fee of up to 30 basis points (bps) that is 0.30% under specific conditions. To avail of this increase, the new inflows from retail investors from beyond the top 30 cities (B30) should be:
- At least 30% of the gross new inflows
OR
- At least 15% of the scheme's average AUM (year to date), whichever is higher.
Conclusion
Charges in mutual fund schemes can make a significant difference in the overall returns of your investment in the long run. Therefore, it is important to pay attention to them. It is also essential to follow's SEBI's announcements in this regard to stay well-informed.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
