Mutual funds have emerged as a popular investment choice for new and experienced investors alike. Along with providing ease of access and diversification, mutual funds also come with a plethora of fees and charges. In this article, we will delve deeper into the various fees and charges associated with mutual funds.
Mutual funds are professionally managed investment portfolios that pool money from several investors to invest in a range of securities such as stocks, bonds, and money market instruments. The fees and charges associated with mutual funds fall into two categories – one-time fees and ongoing expenses.
One-time fees are charged when an investor buys or sells mutual fund units. These fees are known as entry or exit loads. Entry loads are charged when an investor buys mutual fund units, whereas exit loads are levied when an investor sells mutual fund units within a specified period. The purpose of these fees is to discourage investors from holding or selling units too frequently and to compensate the fund manager for the portfolio changes incurred.
The Securities and Exchange Board of India (SEBI) has made it mandatory for mutual funds to charge no entry load while investing in mutual fund schemes. This move aims to ensure transparency and reduce the cost of mutual funds, making them more accessible to investors. However, exit loads can still be charged by mutual fund companies if investors sell their units before a specified time frame known as the exit load period.
The exit load period varies for different mutual fund schemes, and investors must carefully read the offer documents before investing. For example, equity-oriented mutual funds may charge an exit load of 1% if units are redeemed within a year, while debt-oriented mutual funds may charge an exit load of 0.25% for redemption during the same period.
Another one-time fee associated with mutual funds is the transaction fee, which is charged by the mutual fund distributor or broker. The transaction fee is either charged as a percentage of the investment amount or a fixed amount. The fee depends on the investment platform, the investment amount, and the mutual fund scheme selected.
Ongoing expenses are charged for the daily operation and management of the mutual fund. These fees are deducted by the mutual fund company from the scheme’s net asset value (NAV), reducing the returns earned by the investor. The various types of ongoing expenses are listed below:
1. Management fees: The mutual fund company charges a fee for managing the mutual fund’s portfolio. This fee is charged as a percentage of the scheme’s net asset value and is known as the expense ratio. The expense ratio covers the fund manager’s salary, administrative expenses, advisory fees, marketing, and distribution expenses, among others.
The expense ratio ranges from 1% to 2.5% depending on the type of mutual fund and the amount of assets under management. For example, actively managed equity funds have a higher expense ratio compared to passively managed index funds. SEBI has mandated a cap on the expense ratio of mutual funds. The expense ratio of equity-oriented funds cannot exceed 2.25%, while debt-oriented funds cannot charge more than 2%.
2. Custodian fees: The mutual fund company appoints a custodian to hold securities on behalf of the mutual fund. The custodian fee is charged by the mutual fund company and is deducted from the mutual fund’s NAV. This fee is typically charged at a fixed rate and ranges from 0.02% to 0.05%.
3. Registrar and transfer agent fees: The registrar and transfer agent (RTA) takes care of investor records, redemption requests, and the transfer of units between investors. The RTA fee is charged as a percentage of the scheme’s NAV, and the amount varies depending on the mutual fund company.
4. Other expenses: Other expenses may include legal fees, audit fees, printing, and postage expenses, among others. These expenses are charged by the mutual fund company and are deducted from the scheme’s NAV.
It’s important to note that mutual fund fees and charges may vary depending on the mutual fund’s characteristics, such as the type of assets held, the fund management style, and the scheme’s investment objective. Before investing in a mutual fund, investors must carefully read the offer documents, including the scheme’s investment objectives, risk assessments, and the types and amounts of fees and charges involved.
Moreover, investors should stay invested in mutual funds for a long period to benefit from the power of compounding. Compounding refers to the ability of an investment to generate returns on the principal amount as well as the accumulated returns from previous periods. It enables investors to earn higher returns over the long term by reinvesting the returns earned.
In conclusion, mutual fund is an excellent investment option for both new and experienced investors. However, investors must be aware of the various fees and charges associated with mutual funds to make informed decisions. One such option is the Bajaj Finserv App, which provides investors access to a range of mutual funds across asset classes and offers a seamless investing experience. Through the app, investors can also track their investments, review their portfolio performance, and transact in a few clicks.
Investing in mutual funds has become easier than ever, but investors must conduct due diligence before investing to choose the right mutual fund scheme for their investment goals and risk tolerance. Through the Bajaj Finserv App, investors can avail of all the advantages of mutual fund investing with ease, seeking to maximize their returns and meet their investment objectives.
