Charges & Fees: Interesting Fact that will Make Your Hair Stand on End

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 28, 2021

Interesting Facts About Charges & Fees That’ll Make Your Hair Stand on End

Mutual funds are, without a question, a very appealing investing choice in India. As a result, it’s critical to understand the fees associated with mutual fund investment, particularly for investors.

There are three sorts of fees associated with mutual fund investments in general:

One-time fees

The entry load is the fee levied by the AMC when a mutual fund’s units are purchased. This amount is subtracted from the Net Asset Value (NAV), implying that investors would buy a mutual fund at the NAV plus the entry load. Until 2009, an entry load of up to 2.25 percent of the investment value was levied in India. Because this practise is harming the mutual fund industry, SEBI has prohibited the charging of entry loads.
Exit load: This is the fee levied by the AMC when investors sell their units before a certain date. This fee is imposed to discourage investors from withdrawing from the scheme and to reduce the number of withdrawals. Depending on the holding period, different fund houses charge different entry load fees ranging from 0.50 percent to 3.00 percent. However, no exit load is charged if the investors continue to hold the investment beyond the specified period. For example, an equity fund with a NAV of 52/- per unit currently charges a 1% exit load if the investor exits within one year of investment.If an investor wants to sell his mutual fund units that he purchased 6 months ago, the redemption NAV for that investor is 51.28/-. If the investor sold 1000 units, the total exit load would be 528/-. These charges cannot be used by a mutual fund to pay commissions or meet any of its expenses. This 528/ should be reinvested back into the fund, benefiting investors who stay invested for the long term. There would have been no exit load if the investor had left the scheme after one year.
Transaction fees: As transaction fees, investors must pay a small amount. This is a one-time fee assessed during the course of an investment. On investments worth ₹10,000 or more, AMCs may charge a transaction fee of ₹150 for new investors and ₹100 for existing investors. Transaction fees are not levied if the investment is less than ₹10,000.

Expense Ratio/Recurring Expenses/Fund Management Expenses

These fees are levied by the AMC on the Daily Net Assets of the specific mutual fund and are deducted from the fund’s Net Assets every day, with the NAV declared after the expenses are adjusted. However, SEBI has imposed the following limitations on charging such expenses:

However, if recent inflows from cities other than those listed as the top 15 reach up to 15% of the scheme’s Assets Under Management (AUM) or 30% of the gross inflows in the mutual fund scheme, Asset Management Companies can charge an additional 30 basis points in Total Expense Ratio. The most significant value is taken into account. This means that if the TER limit on equity plans is set at 2.5 percent, there’s a chance it’ll be raised to 2.8 percent.

Any excess expense ratio imposed, on the other hand, will be lowered if inflows from cities other than the top 15 are redeemed within a year of the investment date.

To better understand how to calculate the expenditures ratio, consider the following example:

Different mutual fund firms, for example, offer two different types of diversified equities funds. The overall amount of Fund A is ₹1000crs, while the total size of Fund B is ₹100crs. Is it significant in terms of the total expenses incurred by the fund?

Let’s see what we can find out-

The expenditure ratio of Fund A, which has a net asset value of ₹1000 crores, is ₹2.05 percent (20.05/1000). Fund B, on the other hand, has a ₹2.50 percent (2.5/100) expense ratio with Net Assets of ₹100 crores.

The expenditure ratio varies depending on the size of the fund’s net assets, as shown in the figure above. Higher net assets equals lower expense ratio, while lower net assets equals higher expense ratio.

Other Fees

Other indirect costs incurred by investors during the investment period This includes charges for opening a demat account, maintaining the demat account, brokerage fees, and so on. A security transaction tax is levied when buying and selling stocks, and investors must pay it as well.

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Charges & Fees: Interesting Fact that will Make Your Hair Stand on End