As an investor, it is very important to know what are the charges involved in investing in mutual funds. When your money is handled by a team of experts – stocks are bought and sold on your behalf, periodical communication is sent on investments, charges are given to the intermediaries etc and all these expenses come with a cost.
There are no free lunches. So the question is how much a mutual fund can charge? Is it one time in nature or regular?

There are broadly two types of charges:

  1. One time charges:Entry Load:The charges that are levied when the units are being purchased. The mutual fund would sell the unit price higher than the NAV. At present Mutual Funds cannot charge entry load, as per SEBI Regulations of August 2010Exit Load: The mutual fund would buy back the units at rate lower than the NAV. There are no fixed exit loads which are charged. It varies based on the scheme. The current practice is the funds could charge any way from 0.50% to 3.00% depending on the holding period. If the investors continue to hold the investment beyond the specified period, no exit load is charged.
    Example : An equity fund currently at an NAV of Rs. 72/- per unit charges exit load of 1% if the investor exits within 1 year of investment. If an investor wants to sell his mutual fund units, which were bought 7 months back the redemption NAV for such investor would be Rs.71.20/-

If the investor has sold 1000units, the total exit load applicable would be Rs.720/-. A Mutual Fund cannot use these charges for paying commission or meeting any of their expenses. This Rs. 720/ should be invested back to the fund, which would benefit the investors who remain invested for long term.

As per this illustration if the investor redeems after 1 year, there is no exit load.

Example 2: Consider that you are selling 500 units of an equity scheme you had purchased 6 months ago. The scheme charges an exit load of 1% if you redeem the units before one year.  Assume the NAV is Rs.100. You will get Rs.99 per unit [Rs 100 – Rs 1 (1% of 100)] on redemption. The total amount which you will get will be Rs 49,500 (Rs 99 X 500 units). That means you have paid an exit load of Rs 500 (Rs. 1 per unit).

  1. Recurring Charges (Ongoing expenses/Fund Running Expenses):

Transaction Charges: These charges are one time charges applicable when the money is invested. This is applicable for the investments of over Rs. 10,000/-. This would be paid to the distributor/intermediary who is selling the fund.

The transaction charges of Rs. 100/- is charged for the SIP commitment of Rs. 10,000/- or above (not monthly SIP amount). The SIP transaction charges are deducted over 4 installments starting from 2nd installment to 5th installment.

The expenses are charged on Daily Net Assets of the specific mutual fund. The guideline rates are given by the regulator and Mutual Funds cannot charge more than the stipulated structure. The expenses are deducted every day from the Net Assets of the fund and NAV declared is after adjusting the expenses.

Even though the expense ratio structure is stipulated by the regulator, it varies based on the size of the net assets of the fund. Higher the net assets, lower expense ratio and lower the net assets higher the expense ratio. This in turn impacts the returns generated by the respective mutual fund. In-case of funds like Liquid funds, the difference in expense ratio would be one factor

Low cost advantage

Mutual funds are a relatively less expensive mode of investment compared with direct investments in capital markets. SEBI has abolished entry loads (costs) for mutual fund investors who invest directly through the channels owned by asset management companies. However, investments made through intermediaries are charged a nominal transaction fee of Rs.150 for every new folio, and Rs.100 for every transaction thereafter in excess of Rs.10,000. Exit loads (costs) are mostly applicable to short-term investors who exit within a span of one year from the date of investment. Most of the funds in categories like liquid funds do not levy exit loads. Also because of their scale, mutual funds benefit from lower brokerage, custodial and other fees charged to them by the service providers thus making them more cost effective as compared with direct investing

Sneha Ramamurthy

Content Strategist- Dilzer Consultants Pvt Ltd

Credits:

http://economictimes.indiatimes.com/articleshow/51119797.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

http://www.amfiindia.com/Themes/Theme1/downloads/CRISIL-AMFI_singles.pdf