Mutual Fund Charges

When you invest in mutual funds, there are costs associated with investing and these charges are known as mutual fund charges. They can have an effect on the total return on your investment. In this article, we will go through what is mutual fund charges, the types of mutual fund charges and what they mean for your investment. This information allows you to know about the full charges in mutual funds and how it helps investors make better decisions so as to enhance their investment returns.

What are mutual fund charges?

Mutual fund charges are the fees that investors pay when they invest in mutual funds. These fees are to reimburse the fund managers and for the operating expenses of running a mutual fund. Both one-time and recurring charges are part of the fund's returns. Mutual fund charges play a vital role as an investor and it could have a major effect in reducing the net returns over time.

Types of mutual fund charges

Mutual fund charges can be classified under two major types namely, one-time and recurring charges. The fees cover the expenses for investing in and managing a mutual fund. Here, we will see the various charges investors might incur:

1. One-time charges

One-time charges are the fees charged to an investor once during the first time of investment in a mutual fund. Such charges are levied on the purchase or redemption of units in mutual funds. To prevent surprise charges when buying or selling mutual fund units, it is important to know what these fees are.

2. Load

A load is a fee charged in mutual funds charges when investors buy or sell units. It is a kind of commission that businessmen or brokers who help in making transactions are paid with. Entry load and exit load are two types of load fees.

3. Entry load

It is a fee which investors are asked to pay when they buy units of the mutual fund. This charge is debited from the invested amount, as a result, the investor gets fewer units against his investment. Securities and Exchange Board of India (SEBI) has removed the entry loads in mutual funds, which lets investors buy mutual fund units free from any charges.

4. Exit load

Exit Load is a charge levied on investors when they sell/exit their units of the mutual fund. It is charged when the investor sells his/her unit within a specified period, say one year from the date of buying. Exit loads deter premature withdrawals, and promote long-term investments. Normally, the exit load is 0.5% to 1% of the redemption value.

5. Recurring charges

Ongoing fees are a type of fee charged to mutual fund investors, that they pay for so long as they are holding their investment in a given fund. The recurring fees are taken from the fund's assets on a regular basis, usually annually and affect the NAV of this fund.

6. Management fee

A charge paid to the fund manager for managing your mutual fund's portfolio is management fee. By definition, it represents the portion of the total assets under management that will be paid to a fund manager for their expertise and work in deciding where to invest. Management fees are different depending on the type of fund and its investment strategy. This makes the management of fees with actively managed funds generally much higher than passively managed options, such as index funds.

7. Account fee

The charge imposed on an investor by the mutual fund to maintain their account with it is called an account fee. This charge reimburses investment companies for things like recordkeeping, customer service, and sending your account statements. For example, an account fee may be waived if the investor has a high balance or elects to receive statements electronically.

8. Distribution and service fee

The distribution and service fee, otherwise known as the 12b-1 fee is meant to cover costs relating to marketing and distributing mutual funds through brokers or advertisers. All funds have an expense ratio, and distribution fee is typically assessed annually under the expense ratio. The distribution fee is capped at 1% per annum for equity funds and 0.5% for debt funds.

9. Switch price

This is the cost levied when an investor switches from one mutual fund scheme to another in the same fund house. Typically, this is an amount based on what percentage of the funds are being switched and gets automatically deducted from the investor's account. The switch price discourages investors from switching between schemes encouraging them to stay longer with one fund.

Difference in mutual fund charges for direct and regular plans

Direct and regular plans of mutual funds are different in terms of mutual fund charges. Under direct plans, investors purchase mutual fund units directly from the fund house without involving intermediaries. Hence, direct plans have lower expense ratios since no distributor commissions or brokerage are included in the same. On the other hand, regular plans have intermediaries (brokers or distributors) in between and hence they add extra charges to compensate them. Since direct plans provide a lower expense ratio, it can result in higher returns over the long term as cost savings get passed on to investors. For instance, a regular plan may have an expense ratio of 1.5% while the same fund's direct plans would offer it at say around 1%. This difference in costs matters a lot as lower cost translates to higher returns.

While making this decision, Investors must keep in mind that the direct plan is for knowledgeable and experienced investors who are comfortable enough to invest themselves. Direct plans are cheaper as compared to the regular ones but the latter provides advisory services and personalised assistance by intermediaries, which can be a huge benefit, especially for first-time investors.

SEBI guidelines for mutual fund charges

The charges of mutual funds are regulated by the Securities and Exchange Board of India (SEBI) with a view to provide greater transparency as well as, to protect the interests of investors. In order to enable investors to make an informed decision, SEBI has made it mandatory for mutual funds to disclose their total expense ratio, the cost of operating a fund that includes all charges and fees. It further capped the overall management fee and 12b-1 fees so that excessive costs do not eat into the returns of investors. These guidelines promote good practices in the mutual fund industry and even more importantly boost investor confidence.

Conclusion

Charges in mutual funds have the potential to constitute a considerable portion of investment costs, affecting gross and net returns on the fund. By knowing what charges fall under which category and their respective impact, as well as the regulatory boundaries around each charge, investors will need to understand all they need to exercise a careful investment. When deciding to choose between regular or direct plans, it is important for the investors to know about charges in mutual funds charges and how they matter. To get in-depth details regarding multiple funds and to know about mutual fund charges, you can check out Bajaj Finserv platform which gives detailed information. Additionally, some of its algorithm tools help us understand investments far better making investing in mutual funds so easy and smooth. On Bajaj Finserv platform, you can now compare mutual funds from an extensive list of mutual fund schemes.