No doubt, Mutual Fund remains a very attractive investment option in India. So, it becomes really important to know what are the charges involved in investing in mutual funds, particularly for investors.

Broadly, there are three types of charges associated with mutual fund investments:

One-time charges:

1.  Entry load: It is the charge levied by the AMC when the units of a mutual fund are being purchased. This amount is deducted from the Net Asset Value (NAV), which means investors would purchase a mutual fund at the net asset value (NAV) plus the entry load. In India, until 2009, an entry load of up to 2.25% of the value of the investment was charged. Since this practice is negatively impacting the mutual fund industry, SEBI has abolished the charging of entry load.
2. Exit load: This is the charge levied by the AMC when the investors sell off their units before a stipulated time. This fee is levied in order to discourage investors from opting out of the scheme and to reduce the number of withdrawal. Different fund houses charge different entry load fees varying from0.50% to 3.00%, depending on a predetermined holding period. But if the investors continue to hold the investment beyond the specified period, no exit load is charged. For instance, an equity fund currently at a NAV of ₹52/- per unit charges an 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 6 months back the redemption NAV for such investor would be ₹51.28/-If the investor has sold 1000units, the total exit load applicable would be ₹528/-. A Mutual Fund cannot use these charges for paying commission or meeting any of their expenses. This ₹528/ should be invested back into the fund, which would benefit the investors who remain invested for long term.If the investor would have exited the scheme after 1 year, no exit load would have been there.
3. Transaction charges: A nominal amount has to be paid by investors as transaction fees. This is a fee which is charged only once during an investment. AMCs can charge new a transaction fee of ₹150 for new investors and ₹100 for existing investors, on investments worth ₹10,000 and above. However, if the investment is worth less than ₹10,000, then transaction fees are not levied.

Recurring Expenses/ Fund management expenses/Expense Ratio:

These expenses are charged by the AMC on the Daily Net Assets of the specific mutual fund and are deducted every day from the Net Assets of the fund and NAV declared is after adjusting the expenses. However, SEBI has placed certain restrictions on charging such expenses as listed below:

However, the Asset Management Companies can charge an additional 30 bps of Total Expense Ratio if the recent inflows from cities other than that 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. The highest value is taken into consideration. This means that, if the TER limit on equity schemes are 2.5% there is a chance of this going up to 2.8%.

On the other hand, any additional expense ratio charged will be reduced if inflows from cities other than that listed as the top 15 is redeemed within a year from the investment date.

Let’s take an example to understand the computation of expenses ratio:

For instance, there are two categories of diversified equity funds offered by different mutual fund companies. Fund A has a total size of ₹1000crs and Fund B has a total size of ₹100crs. Does it make the difference in terms of the total expenses charged by the fund?

Let’s find out-

Fund A with Net Assets ₹1000 crores has an expense ratio of ₹2.05% (20.05/1000). On the other hand, Fund B with Net Assets ₹100 crores has an expense ratio of ₹2.50% (2.5/100).

From the above illustration, it is evident that expense ratio do vary according to 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.

Other Charges:

There are some other indirect costs incurred by investors during the investment tenure. This includes charges related to opening a demat account, maintaining the demat account, brokerage charges etc. While buying and selling stocks, a security transaction tax is levied which also has to be paid by investors.