Charges you should watch out for while investing in MF

Mutual funds give you access to the expertise of fund managers who can help maximize the returns for your investments. They make investments on your behalf using their domain knowledge, which may be in either equity, debt or combination of both. Through MFs small investors can diversify their portfolios with minimum capital and exposure. Nonetheless, there is nothing called free lunch. Hence, to avail these services investors need to pay some charges. In this article, we will explore the most common charges that investors pay to MF houses.

Exit Load: When you exit a fund by selling your MF units, mutual fund houses can buy those units at prevailing NAV or at lower NAV depending upon how long you have held them. If you have held the units for lesser than the specified days, the mutual fund will charge an exit load. If the fund is held for more than specified days, no exit load would be charged and you can withdraw from the MF at the prevailing NAV.

 In most of the equity funds, the exit load is 1%, however, for some, it is even 4%. The most common holding period is 365 days beyond which there is no exit load.

Example: An equity has current NAV of Rs 100 per unit and charges 1% exit load if units are redeemed before 364 days. Therefore, if you made an investment on January 1, 2017, and sell it on or before December 31, 2017, you will be charged 1% of exit load and the total amount you will receive is Rs 99. In case, you are selling after December 31, 2017, you will get Rs 100.

 Transaction charges: Transaction charges depend upon the type of fund you are availing. If you are going for ‘Direct Plan’, there is no involvement of intermediary or agents and hence there are no transaction charges. While, if you are opting for a regular plan, intermediaries are involved and hence you have to pay one-time transaction charges.

As per SEBI guidelines, following Transaction Charges (TC) is chargeable in respect of investments sourced by Distributors:

• New investors, i.e. first time ever investor in any Mutual Fund (for subscription / SIP only), a Fund House is allowed to charge Rs. 150/- as TC only where the transaction / SIP commitment value is Rs. 10000/- and above.

• Where such a transaction is from an existing investor, the corresponding TC will be Rs. 100/-.

• In respect of systematic investments (SIP only), a TC of Rs. 100/- is payable in 4 equal instalments, starting from the 2nd to the 5th instalment, provided the total commitment towards SIP is for Rs. 10000/- or above.

• Unit holder's statement of account will reflect subscription amount, transaction charges and net investment.

Asset management companies (AMC) will deduct the TC from subscription amount and will give pass back to the distributor through which investment is sourced.

 Total Expense Ratio (TER): These are cost charged by AMC to its unitholders to cover expenses for running the fund including, administrative fees, operating expenses and management fees. These are charged on daily net assets of the fund. Daily NAV is calculated only after deducting these charges. The maximum TER is fixed by SEBI, however, a fund house can charge 0.3% extra if fresh inflows are from cities beyond top 15 cities (B15). Therefore, TER plays important role in determining the long run return of the fund. Nevertheless, these are not fixed and depends on the net asset of the fund. Typically, Large-cap funds have lower TER.