Mutual fund investments provide an accessible and diversified way to create wealth in the long term. Since they’re market-linked, they have the potential to generate returns that are higher than most traditional investment options. However, it is crucial for investors to understand the various mutual fund fees that they’re likely to incur with their investments. In this article, we’re going to look at the various charges that mutual fund houses often levy and what they mean.
What are the Charges Associated with Mutual Fund Investments?
With mutual funds, there are three major charges that you need to be aware of – expense ratio, transaction charges and exit load. Here’s a deep dive into each of these three charges and why they’re levied by Asset Management Companies (AMCs).
1. Expense Ratio
The mutual fund expense ratio is one of the most important charges you need to know. It is an annual fee levied as a percentage of the fund’s daily net assets. AMCs levy the expense ratio to cover the costs associated with managing the mutual fund. These costs include mutual fund management fees, administrative costs, distribution and marketing expenses, fund manager’s fees, registrar fees and custodian charges, among others.
The mutual fund expense ratio is the major charge associated with mutual funds and can significantly impact the returns on your investment. For example, if the expense ratio of a mutual fund is 1.5% and you’ve invested ₹1,80,000 in a fund, you would be liable to pay ₹2,700 (₹1,80,000 * 1.5%) per annum.
The higher the mutual fund expense ratio, the lower your returns are likely to be. Considering the kind of impact that this particular fee has, it may be advisable to choose a fund with a low expense ratio. It is essential to note that AMCs have the freedom to levy expense ratios as they wish, subject to the maximum limits specified by SEBI. Actively managed mutual funds generally tend to have higher expense ratios than passively managed funds.
2. Entry Load
An entry load refers to a fee imposed when investors make their initial investment in a mutual fund, intended to cover the distribution costs for the asset management company. Before 2009, this fee varied across different fund houses in India.
However, current SEBI regulations forbid fund houses from charging an entry load, ensuring that investors are not subjected to this fee, thereby promoting transparency and reducing the overall cost of investing in mutual funds.
3. Transaction Charges
Transaction charges are mutual fund fees that are levied when you purchase and sell units whose total value exceeds a certain limit. In India, the limit is set at ₹10,000, meaning that if you purchase or sell mutual fund units worth ₹10,000 or above, you will be liable to pay transaction charges.
As per the regulations prescribed by the Securities and Exchange Board of India (SEBI), mutual funds can levy a maximum transaction charge of ₹150 from new investors if their transaction value exceeds ₹10,000. In the case of existing customers, however, the maximum transaction charge that can be levied is restricted to ₹100.
4. Exit Load
Another very important component of mutual fund fees and expenses is the exit load. It’s a fee that’s levied when you redeem your investments before the expiration of the specified holding period. The primary objective of the exit load is to discourage investors from exiting the scheme prematurely and to cover the costs that the AMCs incur with the premature exit.
It is crucial to note that the percentage of exit load that can be levied is at the discretion of the AMC. Usually, most mutual funds levy a load of 1% on the total value of redemption. So if your value of premature redemption is ₹50,000, you need to pay an exit load of ₹500 (₹50,000 * 1%).
That said, not all mutual funds levy exit loads. Therefore, if you’re planning to sell mutual fund units regularly before the specified holding period expires, it is advisable to choose a fund that doesn’t levy an exit load.
Why Do Regular Plans Have a Higher Expense Ratio?
Asset management companies often have two different kinds of plans on offer for the same mutual fund – a direct plan and a regular plan. In a direct plan, you invest in a mutual fund directly through the AMC. In a regular plan, you invest in the fund through a distributor or agent affiliated with the asset management company.
Both the direct and regular plans for a mutual fund are similar in all aspects, from the portfolio of assets to the fund manager and their strategies. They only vary in one aspect – the expense ratio.
Regular plans often have higher expense ratios than direct plans of the same mutual fund. The primary reason for this is the involvement of the distributor or agent in the regular plan. Expenses such as distribution costs and agent commissions are added to the expense ratio of regular plans, making them more expensive than the direct plan.
What is the Maximum Expense Ratio Limit in India?
The SEBI has given asset management companies the freedom to set mutual fund expense ratios. That said, the AMCs cannot exceed the maximum expense ratio limits as specified under Regulation 52 of the SEBI Mutual Fund Regulations.
The maximum expense ratio that AMCs can levy varies depending on the total assets under management and the type of fund. The more assets a fund has under its management, the lower the expense ratio will be. Here’s a table outlining the limits specified by SEBI.
| Assets Under Management (AUM) | Debt Mutual Fund Expense Ratio Limits | Equity Mutual Fund Expense Ratio Limits |
| Up to ₹500 crore | 2.00% | 2.25% |
| On the next ₹250 crore | 1.75% | 2.00% |
| On the next ₹1,250 crore | 1.50% | 1.75% |
| On the next ₹3,000 crore | 1.35% | 1.60% |
| On the next ₹5,000 crore | 1.25% | 1.50% |
| On the next ₹40,000 crore | 0.05% reduction in the expense ratio for every ₹5,000 crore increase in the daily net assets | 0.05% reduction in the expense ratio for every ₹5,000 crore increase in the daily net assets |
| Exceeding ₹50,000 crore | 0.80% | 1.05% |
Conclusion
Mutual fund fees and expenses are integral components of mutual fund investments in India. These charges have a major impact on the returns you get from your investments. The lower mutual fund charges are, the higher your returns are likely to be.
That said, when choosing a fund, make sure to consider other factors like investment objectives, risk profile, past performance and the fund manager’s expertise, in addition to mutual fund charges. This will allow you to make informed investment decisions that are in line with your financial goals.
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FAQs
What are some of the charges associated with mutual funds?
Mutual fund expense ratio, exit load and transaction fees are some of the charges associated with mutual funds in India.
What is an expense ratio, and how does it impact my mutual fund investments?
The mutual fund expense ratio is a fee that an asset management company charges. It is expressed as a percentage and is levied on the total value of your investment. The expense ratio is charged to cover costs associated with fund management, administration, marketing and other activities.
Are entry loads a part of mutual fund fees and expenses in India?
No. The Securities and Exchange Board of India (SEBI) has abolished the concept of entry loads in mutual funds. The practice of charging entry loads has ceased since August 2009.
What are exit loads, and when are they levied?
Exit loads are a type of mutual fund fee and expense that’s levied if you redeem your investments before the expiration of the stipulated holding period. The fees are generally levied to discourage investors from short-term trading and to cover the costs that the mutual fund house incurs due to early redemptions. Once the stipulated holding period expires, exit loads are not levied.
Are there any regulatory guidelines governing mutual fund charges in India?
Yes, the SEBI has notified several rules, regulations and circulars that deal with mutual fund charges in India. The regulatory guidelines of SEBI concerning mutual fund fees ensure transparency and protect investors’ interests.
