Mutual Fund Fees & Charges in India 2024
Mutual funds have become increasingly popular over the last few years as a solution to earn significant investment returns. But, one must also pay attention to the fees a mutual fund charges as they reduce investment returns. In today’s blog, we will discuss the various fees a mutual fund charges and their meaning.
Depending on the goal of the investment scheme, fund managers chosen by mutual fund firms, sometimes referred to as asset management companies (AMCs), allocate their money across different asset classes. These firms charge their investors a nominal fee for the entire process to cover their ongoing costs, also known as the expense ratio. These asset management companies get their revenue from the fees that they charge.
Types of Fees Charged by Mutual Fund
There are several kinds of fees charged by the AMC, a few of which are mentioned below-
- Entry Load: Asset management firms impose a fee on investors when they invest for the first time in the scheme. In the early stages of the mutual fund industry, this was imposed to cover the distribution expenses related to the mutual fund industry’s marketing and sales. The Securities Exchange Board of India eliminated this charge later in 2009 (SEBI).
- Exit Load: This is a fee that investors must pay if they withdraw their money before a certain time. The time frame is known as the lock-in period, and it varies from plan to plan. The exit load typically ranges from 0.25% to 4% of the redemption value. There is no exit load if you redeem your money after the lock-in period. The AMC imposes this fee to deter investors from withdrawing early.
- Transaction Charges: Mutual funds impose these fees on you upon buying and selling mutual fund units when the transaction amount goes above a certain threshold. In India, this threshold is INR 10,000. If you buy units worth more than INR 10,000 as a new investor, you will be charged a maximum of INR 150 as transaction costs, and if you are an existing investor, the maximum amount that can be charged is INR100.
- Expense Ratio: The mutual fund companies also impose other fees, which typically include fund management fees, audit fees, marketing and sales costs, and administration and distribution costs. This charge is computed by dividing the total expenses of the scheme by the total assets managed by AMC. This fee is typically charged on an annual basis.
Calculation of Total Expense Ratio
The total expenses charged by the mutual fund can be calculated by using the below-mentioned formula:
Total Expense Ratio(TER) = [(Total Costs of the Fund during the period) / (Total Fund Assets)]*100
Let us understand this with an example.
Assume that an AMC pays 10 crores in total expenses, which includes fund manager fees, marketing and distribution costs, etc., for a fund with a total asset value of 1000 crores. Next, the ratio of expenses will be computed as
(10 Crores/1000 Crores)*100 = 1%.
Suppose an investor has invested INR 5,00,000 in the scheme, and then the total expense ratio of the scheme is 1% of 5,00,000 = INR 5,000. Investors get charged this amount annually.
SEBI Guidelines on Mutual Fund Charges
The maximum TER (Total Expense Ratio) limit for mutual funds is determined by the Securities and Exchange Board of India (SEBI). It depends on the amount of assets the company manages. Guidelines on charges are as follows:
| Asset Under Management (Crores) | Equity-oriented mutual funds (Max. TER) | Other mutual funds (Excluding FoFs, ETFs and index funds) (Max. TER) |
| Up to 500 | 2.25% | 2.00% |
| 500- 750 | 2.00% | 1.75% |
| 750- 2000 | 1.75% | 1.50% |
| 2000- 5000 | 1.60% | 1.35% |
| 5000- 10,000 | 1.50% | 1.25% |
| 10,000- 50,000 | TER decreases by 0.05% for every increase of 5000 crore in AUM | TER decreases by 0.05% for every increase of 5000 crore in AUM |
| > 50,000 | 1.05% | 0.80% |
To boost the penetration of mutual funds in Tier 2 and Tier 3 cities in India, SEBI has further permitted the AMCs to charge an extra 0.30% on top of the previously indicated restrictions for selling their products in cities outside of the top 30 cities in the country.
Impact of Expense Ratio
The expense ratio directly impacts your mutual fund investment’s returns. However, these costs represent a minor amount of your investment; over time, they may consume a greater share of your return. Generally speaking, investors believe that a fund with a larger expense ratio will yield higher returns. However, this is not a suitable strategy for selecting a mutual fund because skilled fund managers can manage funds with a lower expense ratio. Therefore, it is important to review the fund’s expense ratio if you are currently investing or plan to do so.
Conclusion
Mutual funds are becoming increasingly popular as they provide investors access to professional market expertise to earn substantial returns. However, investors must be careful of the fees they charge and have a good understanding of them to minimize the impact of mutual fund fees on investment returns and select the best mutual fund.
Frequently Asked Questions (FAQs)
What are the charges associated with the mutual fund investments?
Exit load, transaction charges, and expense ratio are the costs related to mutual funds.
What is the exit load?
Mutual fund firms impose this fee to prevent investors from making early withdrawals. It is based on the investor’s holding term; for instance, 1% is charged as an exit load if the withdrawal is made within a year after the investment.
Is there any restriction on fees charged by mutual fund companies?
Yes, official norms specify a threshold that no asset management business may charge fees above, as provided by the mutual fund regulatory body SEBI.
Do investors pay fees to start investing in a mutual fund?
No, there aren’t any costs to start investing in mutual funds. In the past, AMCs levied a fee known as an entry load, but SEBI eliminated that fee in 2009.
Do I need to pay transaction charges every time I invest in a mutual fund?
If you are investing or withdrawing more than INR 10,000, the regulation allows mutual funds to charge INR 100 for existing investors and INR 150 for new investors as transaction charges.
