Exploring 4 Key Fees and Charges in Indian Mutual Funds

Summary

The blog presents an overview of fees and charges linked to mutual fund investments in India. It explains the removal of entry loads, the structure of exit loads, transaction charges, and varying expense ratios, including TER limits set by SEBI based on AUM. It also emphasizes the importance of reviewing detailed fee disclosures and risk documents before investing.

Understanding the fees and charges linked to mutual fund investments in India is essential for making informed decisions. Below is a concise overview of these costs:

The Entry Load was designed to cover distribution expenses related to marketing the fund. However, SEBI scrapped this fee in 2009, so investors no longer face an entry load.

An Exit Load is charged when investors redeem units within a stipulated duration post-purchase. Typically about 1% of the redemption value, it aims to deter premature exits to manage the fund's liquidity. Generally, this charge applies for exits within a year and is usually waived after one year.

Transaction Charges

are levied once per investment, ranging from Rs. 100 to Rs. 150 for investments above Rs. 10,000, including SIPs of the same amount. Smaller investments are generally exempt from these charges.

The Expense Ratio is an annual fee, shown as a percentage of the fund’s daily net assets, covering management, sales, marketing, administrative, and fund manager fees. Regular plans often have a higher expense ratio due to commissions paid to intermediaries, unlike direct plans.

Maximum Expense Ratio Limits in India:

SEBI enforces a cap on the total expense ratio (TER) for asset management firms. For equity-centric mutual fund schemes, TER varies based on AUM (Assets Under Management). For example, funds with AUM surpassing Rs. 50,000 crore have a 1.05% TER cap, which declines by 0.05% with every additional Rs. 5,000 crore in AUM.

More than Rs. 50,000 crore: 1.05%
Between Rs. 10,000 crore and Rs. 50,000 crore: TER decreases by 0.05% for every Rs. 5,000 crore AUM increment.
Between Rs. 5,000 crore and Rs. 10,000 crore: 1.50%
Between Rs. 2,000 crore and Rs. 5,000 crore: 1.60%
Between Rs. 750 crore and Rs. 2,000 crore: 1.75%
Between Rs. 500 crore and Rs. 750 crore: 2.00%
Up to Rs. 500 crore: 2.25%

Additionally, SEBI allows an extra charge of 0.30% for promoting funds in areas outside the top 30 cities to broaden mutual fund adoption in tier 2 and tier 3 regions in India.

Prior to investing in any mutual fund schemes, it is vital to review the associated fees and charges, usually detailed in the Consolidated Account Statement (CAS). Closely examine the Risk Disclosure documents, as investments carry market risks, and achieving investment goals cannot be assured. It's important to remember that past performance does not guarantee future results.