Fees and charges for investing in mutual funds in India
Mutual funds are pooled investments managed by qualified fund managers who invest the money in securities such as equities, bonds, and short-term debt to generate inflation-beating returns. However, fund management involves costs that must be borne by mutual fund investors. Various mutual fund charges are levied on investments to meet the cost of managing funds and the operational and transactional costs of the fund house.
In this blog post, we will discuss mutual fund charges that apply when you invest in a mutual fund scheme. Let’s dive in.
What are the charges associated with mutual fund investments?
- Entry Load
Entry load refers to the fee that investors pay when they purchase units of a mutual fund scheme. This charge is deducted from the investment amount at the time of purchase, meaning that only a portion of the investment is allocated to the fund.
Entry load has been banned in India since 2009. Therefore, if you are looking to invest in mutual funds, entry load should not be a concern for you.
- Exit Load
Asset Management Companies (AMCs) charge a fixed percentage fee when investors redeem or withdraw their investments from a particular scheme before a fixed period. These charges are termed exit load, or mutual fund withdrawal charges.
Exit load is a deterrent against premature withdrawals, encouraging investors to maintain their investments for the intended duration. This helps stabilize the fund and ensures better portfolio management.
Exit loads are typically calculated as a percentage of the Net Asset Value (NAV) at the time of redemption. For example, if an investor redeems his investment and the applicable exit load is 1%, this percentage is deducted from the total NAV being redeemed. If an investor holds units worth ₹60,000 and incurs a 1% exit load, ₹600 will be deducted and ₹59,400 will be credited to the investor’s account.
Likewise, SIP withdrawal charges, a type of exit load, apply if you redeem your SIP investment before the holding period mandated by the specific fund house. But investors should understand that every SIP installment is considered a fresh purchase and thus the holding period can vary for each installment depending on the date of investment.
While exit load is common, not all mutual funds impose exit loads. Some may have no exit load, particularly index funds or certain types of debt funds. Investors need to review the scheme documents for specifications on applicable exit loads before investing.
Transaction Charges
Another type of mutual fund charge in India is transaction charges. Transaction charges refer to fees levied on the purchase and sale of mutual fund units over a certain value.
In India, transaction charges apply to investments or redemptions that exceed ₹10,000. This means that if an investor’s transaction amount is below this limit, he will not incur any transaction charges.
As per the Securities and Exchange Board of India (SEBI) regulations, mutual funds can levy a maximum transaction charge of ₹150 from new investors if the transaction value exceeds ₹10,000. However, for existing customers, the maximum transaction charge that can be levied is restricted to ₹100.
Expense Ratio
Expense ratio is the annual fee expressed as a percentage of the fund’s average assets under management (AUM). It covers management fees, administrative costs, and other operational expenses. Expense ratio typically ranges from 0.5% to 2.5% depending on the fund type and management style.
The formula for calculating the expense ratio is:
Expense Ratio= (Total Expenses/Average AUM)×100
A higher expense ratio will eat into your returns. Therefore, expense ratio should be a part of your research before selecting a mutual fund scheme.
Why do regular plans have a higher expense ratio?
The direct vs. regular mutual fund investment debate has been doing the rounds for quite some time now. One argument against investing in regular mutual fund plans is that they incur higher expenses and thus have a higher expense ratio, impacting investment returns.
Regular mutual fund plans have a higher expense ratio as the investment happens through an intermediary. This involves expenses such as distribution costs, higher marketing expenses, and compensation or commission for distributors and advisors.
Naturally, these costs add to the cost of investment, lowering investment returns.
What is the maximum expense ratio limit in India?
Under SEBI (Mutual Funds) Regulations, 1996, mutual funds are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets.
All such costs for running and managing a mutual fund scheme are collectively referred to as the Total Expense Ratio (TER).
These limits are designed to protect investors by ensuring that mutual funds do not charge excessively high fees relative to the services provided. Lower expense ratios can significantly enhance net investment returns over time.
Effective April 1, 2020, the TER limit has been revised as follows.
| Assets Under Management (AUM) | Maximum TER as a percentage of daily net assets | |
| TER for Equity funds | TER for Debt funds | |
| On the first Rs. 500 crore | 2.25% | 2.00% |
| On the next Rs. 250 crore | 2.00% | 1.75% |
| On the next Rs. 1,250 crore | 1.75% | 1.50% |
| On the next Rs. 3,000 crore | 1.60% | 1.35% |
| On the next Rs. 5,000 crore | 1.50% | 1.25% |
| On the next Rs. 40,000 crore | Total expense ratio reduction of 0.05%for every increase of Rs.5,000 crores ofdaily net assets or part thereof. | Total expense ratio reduction of 0.05%for every increase of Rs.5,000 crores ofdaily net assets or part thereof. |
| Above Rs. 50,000 crore | 1.05% | 0.80% |
Source: AMFI
Conclusion
Unlike direct investments in stocks, mutual fund investments are portfolios professionally managed by fund managers for a fee. We have discussed different types of mutual fund charges in this blog. As an investor, you should evaluate these charges carefully before making an investment decision as high charges can hurt your returns.
