What are the expenses incurred in a mutual fund scheme?
Mutual funds in India as an investment instrument have acquired great acceptance among a huge section of investors over the past few years. Reasons primarily are attractive returns yielded by mutual fund investment through both equity and debt and a falling interest rate of small saving schemes and bank fixed deposits. As most of the investors participating in mutual funds are novice, they must be aware of at least the basics and crucial charges involved in such investment before opting for this investment avenue.
Checkout here some of the crucial charges that AMCs or fund houses usually charge:
- Total Expense Ratio (TER)
TER is the annual operating expenditure as a percentage divided by average daily net assets. Annual operating expenses involve advisory fees, sales, investment management, ongoing service fees, agent and sales commission, legal and audit fees, registrar, and transfer fees, selling and marketing expenses and fund administration expenses. As the expenditures are met from assets managed by the fund, lower TER results in a higher return. TER of a direct option is usually up to 1 percent lower than its regular counterpart as the former gets sold directly to you without adding any distributor expenses. Savings in the distribution expenditures stay invested in direct plans, which begin to yield returns on its own owing to the compounding effect. While in the starting years you might find this difference in returns to be extremely small but over the long run investment in direct plan yields a substantial return.
For instance, suppose via an MF online platform, you invest Rs. 35,000 through an SIP in a regular option of an equity mutual fund having an expense ratio of 2% for 25 years. If it yields 14% average annualised return, the corpus will be Rs. 5.99 crore at the end of the SIP tenure. If the same amount is invested in a direct option of the same fund having an expense ratio of 1% for the same tenure, then the corpus will be Rs. 7.21 crore at the end of the SIP tenure. Difference in corpuses will be a staggering Rs. 1.22 crore, which means direct plan will outperform regular plan by around 17%.
- Mutual fund loads
Mutual fund loads are a one-time charge levied during the investment time in a mutual fund scheme or when exiting the mutual fund scheme. Applicable charges include:
- Entry load: It is charged when you invest in a mutual fund scheme. Usually, the amount is reduced from your fund’s NAV (Net Asset Value). However, according to SEBI regulations, fund houses are not allowed to charge any entry load in India.
- Exit load: When you exit the mutual fund scheme within a short period of holding the same scheme, an exit load is levied. The fees are levied to discourage investors from exiting the scheme and lower the number of redemptions. Distinct fund houses charge distinct entry load charges based upon a predefined holding period.
When making investment decisions, be it mutual funds or the stock market, it is advisable to consult an expert so that your basic aim of generating wealth is fulfilled without any hiccup, in tune with your risk tolerance and investment horizon. Reach out to one today and begin your investment journey!