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:
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.
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.
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