Know Your Expenses During Mutual Fund Investment

by otopenews

Mutual Funds are great investment options that allow you to experience the return potential of the capital market and that too at very little investments. However, they come with associated charges and hence one should know the types of such charges on the scheme before investing. The expenses associated with a mutual fund scheme are either one-time charges or recurring charges. The expenses eat into your investments and affect the returns. That is why you should understand the expense structure. Here are the different types of expenses incurred in mutual fund investments –

Let us understand each one in details –

One-time charges

  • Entry Load :- Entry load is applicable when one first invests in a mutual fund scheme. However, thanks to SEBI guidelines, currently, there is no entry load applicable on mutual fund investments.
  • Exit Load :- Exit load is applicable at the time of redemption. When you redeem the mutual fund, the exit load is deducted from the applicable NAV and your units are redeemed at the reduced NAV. For instance, if there is an exit load of 1% and the NAV on redemption date is Rs.100, you would be able to redeem your units at Rs.99 after deducting the exit load of 1%. However, there are stipulated tenures in mutual fund schemes after which no exit load is charged. For instance, the scheme might not charge the 1% exit load if you redeem your investments after 1 year. Different Mutual fund schemes have different exit load. Exit load is, usually, fixed anywhere between 0% and 3% depending on the mutual fund scheme.
  • Transaction Charge :- This charge is applicable only for first-time investment in a mutual fund scheme. The charge is levied only if your investment is Rs.10,000 and above. If you are a new investor to mutual funds, your charge would be Rs.150. If you are an existing investor the charge is reduced to Rs.100. For Systematic Investment Plan (SIP) investors, investing an aggregate of Rs.10,000 of more in SIP, the charge is Rs.100 for existing investors and 150 for new investors.
  • Stamp Duty charges : – From 1 July 2020, stamp duty is imposed on the purchase of mutual funds whether it is debt, Equity, Gold or hybrid mutual fund. It is imposed only on purchase transactions. This means when you invest into a mutual fund, stamp duty will be levied.

Must read: The Five Secrets You Never Knew About Mutual Funds

In other words, we can say that stamp duty will be applied on following transactions where investment is made:-

  1. Lump sum investment
  2. Systematic investment plans (SIPs) and
  3. Systematic transfer plans (STPs),
  4. Dividend reinvestment

It is not applicable on the redemption of units.

Rate applicable – 0.005% on the purchase or switch in amount and 0.015% for transfers between demat account i.e ETF units. To understand it better, lets say on an investment of Rs. 1,00,000, stamp duty paid will be Rs.5.

As it is a one-time expense at the time of purchase, it is more like an entry load. But the impact will not be much for long term investments. Usually debt investments are made for short term specifically, liquid funds. So here the impact would be more.

If you are doing investment for the long term then you will be least affected with this new stamp duty imposition. It is recommended to not switch your funds very frequently especially in a short term and also try to avoid dividend reinvestment option. Opt for growth option instead.

Recurring Expenses

  • Total Expense Ratio

Mutual fund schemes pool money from different investors. Thereafter, an Asset Management Company (AMC) manages the pooled money and invests it in different instruments. The AMC incurs various charges in managing your investments and providing returns. Charges like fund management fees, marketing and selling expenses. Also, administrative expenses, registrar fees, custodian fees, trustee fees, etc. are incurred by AMCs. These charges are recovered from you in the form of Total Expense Ratio (TER) or Fund Management Charges. TER is expressed as a percentage and calculated as follows –

TER = (Total expenses incurred in a year/Total assets of the fund)*100

SEBI has listed the maximum TER which AMCs can charge. It is as follows* –

Average Net Assets for a week TER Limits for Equity Schemes TER Limits for Debt Schemes
For the first Rs.100 crores 2.50% 2.25%
For the next Rs.300 crores 2.25% 2%
For the next Rs.300 crores 2% 1.75%
On the remaining assets 1.75% 1.50%

Must read: Creating Wealth By Doing SIP – Power Of Compounding

Furthermore, there is an additional 30bps on the TER which AMCs can charge if the net inflows from beyond top 15 cities are at least 30% of the gross inflow of the scheme or 15% of the scheme’s total AUM (Assets under Management) since inception, whichever is higher.

The NAV of the scheme is calculated after deducting the TER and other liabilities. A lower TER is better as it increases NAV and ensures higher returns.

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