Mutual Fund Investment Charges – Types of Charges, Direct and Regular Plans Fees & more
As an investor, one must also be aware of all kinds of different mutual fund investment charges that a company imposes on its services.
Mutual fund investments are one of the most popular forms of investment in the modern world.
Because of their ability to deliver attractive returns and other benefits, many people choose to invest in mutual funds as compared to other conventional methods of investment.
Investing in mutual funds gives you a huge advantage of professional fund management.
When a team of experts handles your investment charges, the Asset Management Company (AMC) can charge quite a load of expenses on your behalf.
The professional fund managers also need their salaries; distributors require commissions to sell their fund schemes, marketing, and transactional costs, auditor’s fees, registrar’s expenses, and the fees of a transfer agent, etc., are some of the payments an AMC handles on its own.
Hence, government rules allow mutual fund companies to deduct some portion of the investments to make up for these expenses.
The company has to give back all the remaining parts of the return to the investors.
Every investor must know about the different kinds of expenses like one-time expenses or recurring expenses, and also about the expense ratio.
Different Types of Mutual Fund Investment Charges
The different kinds of mutual investments carry different types of charges. The common charges also have two sub-categories, namely, one-time charges and recurring charges.
One-time charges are the expenses a company levies during the initial period of investment. These charges include:
Every Asset Management Company charges a nominal fee when an investor purchases a unit of a mutual fund scheme. A company usually deducts this amount from the fund’s Net Asset Value.
However, in 2009, the Securities and Exchange Board of India (SEBI) abolished entry loads for any kind of mutual fund investment.
Currently, investors do not need to pay an entry load while investing in India.
Mutual fund companies charge an exit load when an investor exits from a mutual fund investment within a short period. Such a load is not mandatory and can vary from scheme to scheme.
A company charges an exit load to discourage the investors from opting out of the investment soon and decrease the number of withdrawals.
Exit load is normally closer to 1% of the redemption amount, but, as per the SEBI guidelines, a fund house can charge up to a maximum limit of 7%.
Transaction charges are one-time charges that are also applicable at the time of investment.
As per the SEBI mandate, new investors have to pay Rs.150 as a transaction fee, whereas existing investors have to pay Rs.100 for the same.
This is applicable for investments over Rs.10,000, and this amount is payable to the distributor who is selling the fund.
Recurring charges are the most important mutual fund investment charges every investor has to keep in mind.
Also called the Total Expense Ratio (TER), it is the fee an investor has to pay on a daily, quarterly, or annual basis.
Ideally, TER includes the fee for maintaining the portfolio, distribution, service, marketing, management, switching between funds, and legal purposes.
For example, if one invests Rs.20,000 in a fund that has an expense ratio of 2%, which also means he/she needs to pay Rs.400 to the company to manage his/her money.
One can calculate his/her Total Expense Ratio by dividing the total expense incurred in an accounting period by the total net assets of the fund and then multiplying it by 100.
The SEBI has a specific set of guidelines for the TER of different kinds of mutual funds based on size and weekly net assets. The guidelines are as follows:
|Average Weekly Net Assets||Limit Applicable on an Equity Scheme||Limit Applicable on a Debt Scheme|
|First Rs. 100 crores||2.50%||2.25%|
|Following Rs. 300 crores||2.25%||2.00%|
|Following Rs. 300 crores||2.00%||1.75%|
|Over Rs. 700 crores||1.75%||1.50%|
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Difference in Mutual Fund Investment Charges for Direct and Regular Plans
Broadly speaking, there are two different kinds of plans for mutual funds- Direct plan and Regular Plan.
As the name suggests, direct plans also enable an investor to buy a mutual fund without a financial intermediary in between.
Besides, in regular plans, an investor purchases/sells mutual funds via financial intermediaries.
These intermediaries can be advisors, brokers, or distributors. Both direct plans and regular plans are under the authority of the same mutual fund manager.
Both direct and regular mutual fund plans have their own specific set of features.
You can look at the following table to know all the basic differences between a direct and regular plan put forward in the simplest form:
|Parameter||Direct Plan||Regular Plan|
|Returns||High (With no additional fees for the intermediaries)||Low|
|Expense Ratio||Low Expense Ratio||High Expense Ratio|
|Net Asset Value||High||Low|
|Market Research||Done by self||Done by the advisor|
|Investment Advice||Not available||Provided by the advisor|
Why is the Total Expense Ratio Higher for Regular Plans?
If you see the table, you’ll notice that the recurring charges for regular plans are higher as compared to the direct ones.
This is because the Asset Management Company has to pay a certain commission to the intermediary. A company ultimately deducts this amount from an investor’s returns.
If you are completely new to the field of mutual fund investment, it is more beneficial to purchase a regular mutual fund plan.
This might be a little expensive but can save you from any kind of heavy losses as you will be new in this field.
In case you are well-informed about the risks and other aspects of mutual fund investment, it is better to invest in a direct plan of a mutual fund scheme.
While recurring charges are also associated with direct plans, they tend to be much lower when compared to the regular ones.
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Ways to Minimize Your Mutual Fund Investment Charges
Here are various reasons to minimize your mutual fund fees or charges –
Know Your Strategies Properly
Mutual fund investment is nothing without a carefully planned out strategy. An investor must have proficient knowledge of when to buy, hold, or sell the investments.
Since buying and selling actions have a certain amount of fees related to them, an investor must take these decisions carefully.
Consider all the Tax Implications
Investing in mutual funds (especially equity funds) has numerous tax implications that every investor needs to factor into their calculations.
This will give them a proper perspective of their final yield and help them to take more apt decisions.
Even if you’re paying higher fees, ensure that your funds are outperforming as compared to the funds with lower fees.
Beware of Huge Discount or Little Fees Offers
As the financial sector is evolving continuously, it also offers a chance for frauds and other illegal dealers to attract customers with unlawful schemes disguised in the form of offers or little fees.
Investors need to review the chosen management’s credentials very carefully and thoroughly.
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Conclusion – Mutual Fund Investment Charges
Generally, investments appear deceptively low to individual investors. An expense ratio of 2% may seem also inconsequential to an investor, and he/she may dismiss it without any proper thinking.
The percentage amount of mutual fund investment charges does not reveal the actual fee an investor has to finally pay to the company.
Also, with a high expense ratio, a higher portion of your money will go to the management company.
And the more fees a management company charges, the better the fund has to perform to cover up the deducted amount.
Recently, investors have become more sensitive towards the fees they are paying to the management companies.
Studies show that mutual fund investment charges have dropped substantially, but every investor still needs to pay high attention to the charges he/she is paying.
Besides, expensive investments don’t need to always reap higher returns. Lower-cost funds can produce better results from time to time.
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