Costs involved in mutual fund investing

Before investing in mutual funds, it is very vital on the part of the investors to
know about the expenses levied by the Fund Houses. Read this space to know
everything about mutual funds expenses incurred by investors. (more) ,
CRISIL Research | Mutual funds expenses are the charges levied by the Fund
Houses and incurred by the investors who hold mutual fund schemes. Before
investing in mutual funds, it is very vital on the part of the investors to know
about these expenses as they can substantially reduce an investor's earnings.
1. What are the expenses that mutual funds charge to investors? Asset
management companies (AMCs) manage the assets of the mutual funds and
take the investment decisions. AMCs charge investors for professional fund
management and regular operational costs which include investment
management and advisory fees, sales/agent commissions and ongoing service
fees, legal and audit fees, registrar and transfer agent fees, fund
administration expenses, and marketing and selling expenses. All these
expenses charged to an investor are together called the 'total expense ratio'
(TER); it is an annual charge on AUM in percentage terms. According to the
Securities and Exchange Board of India's (SEBI's) guidelines, TER needs to
be lower as AUM increases. The net asset value (NAV) of a mutual fund
scheme is net of all liabilities including TER, and hence a lower TER results
in higher returns and vice versa. In a recent circular, SEBI has included
service tax under 'cost to investors' (earlier paid by AMCs).

2. How is total expense ratio calculated? Total Expense Ratio (TER) is

calculated as follows - TER = (Total expenses during an accounting period) *
100 / Total net assets of the fund.

3. What are the recent changes introduced by SEBI under TER? SEBI has
recently come out with a circular that AMCs would be allowed to charge an
additional 30 bps of TER on the condition that the new inflows from beyond

top 15 cities are at least 30% of gross new inflows in the scheme or 15% of
the scheme's AUM (year-to-date), whichever is higher. In other words, TER
may go up to 2.8% instead of 2.5% for equity schemes. However, the
additional TER will be clawed back if inflows from beyond top 15 cities are
redeemed within a period of one year from the date of investment. The
circular also stated that mutual funds shall annually set apart at least 2 bps on
daily net assets within maximum limit of TER for investor education /
awareness initiatives
4. What are mutual fund loads? Loads are one time charges which are levied
either at the time of investing in or at the time of exiting a mutual fund
scheme. These are over and above the TER.
A Entry load: It is a front-end charge deducted from the NAV at the time of
investing in a mutual fund scheme. SEBI abolished entry loads in August
2009. These charges were as high as 2.25% for equity funds prior to the
abolition.
B. Transaction charge: Starting August 2011, SEBI has allowed AMCs to
collect a nominal amount as a one-time transaction fee. It ruled that for a first
time investor, AMCs can collect Rs 150 as a fee if the investment is more
than Rs 10000 while the fee for an existing investor would be Rs.100; no fee
can be charged for any amount less than Rs.10000. In the case of Systematic
Investment Plans (SIPs), where the total commitment towards the SIP is more
than Rs. 10000, a transaction charge of Rs. 100 will be levied payable in four
equal installments starting from the second to the fifth installment.
C. Exit Load: It is a charge levied when an investor redeems / sells his units
in a short span of time since he made the investment. Mutual funds charge
exit loads to deter investors from leaving mutual fund schemes before
holding them for a sufficient period. Various categories charge exit loads
depending on pre-defined holding period cutoffs. For instance, in a liquid
fund, most schemes do not charge an exit load as investors invest in these
funds for a shorter duration. For most other categories, the exit load ranges

between 1-3% depending on the exit time frame specified by the fund.