Mutual Fund Charges

Mutual fund charges are fees levied by an asset management company to cover the costs of managing and operating a mutual fund scheme. These charges encompass various expenses, including sales and marketing, administration, distribution, and the fund manager's fees.
Charges In Mutual Funds
3 min
10-October-2024
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:

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.

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.



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.



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.



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.



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.



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.



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.



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 what are mutual fund 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.

Frequently asked questions

What is an expense ratio in mutual funds?
An expense ratio measures the annual expenses of a mutual fund as a percentage of assets. This involves management fees, administrative expenses and other operating costs.

How does the expense ratio impact my returns?
A higher expense ratio decreases the net returns that come from a mutual fund since a larger percentage of the mutual funds’ assets will be used to cover these expenses.

Are there any hidden charges in mutual funds?
SEBI regulations require that mutual funds declare all the charges and fees, whether direct or indirect in their scheme documents.

What are distribution and service (12b-1) fees?
They are typically used to cover marketing and distribution costs such as broker commissions or advertising expenses and are also known as 12b-1 fees.

What is the impact of high expense ratios on long-term investments?
Over the long term, high expense ratios can easily eat into a percentage of annual returns.

Can I compare mutual fund charges across different funds?
Investors can compare mutual fund charges across different funds by checking the expense ratios and other disclosed costs in scheme documents.

What are performance-based fees in mutual funds?
Performance-based fees are amounts based on the mutual fund's return relative to a benchmark index or target, motivating fund managers to outperform.

Do index funds have lower charges compared to actively managed funds?
Since they simply replicate the composition of a market index and do not require regular portfolio management work, their charges are usually lower than actively managed funds.

Are there any tax implications associated with mutual fund charges?
Even though the mutual fund charges are not tax deductible, they do lower net returns which in turn lowers taxable income from investment.

Can I negotiate mutual fund charges?
Mutual fund expenses for the most part is non-negotiable as they are standardised and dictated by SEBI. Still, larger investors or institutions might be able to negotiate fees under certain conditions.



Show More Show Less

Bajaj Finserv App for All Your Financial Needs and Goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.
Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

Disclaimer:


Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.

This information should not be relied upon as the sole basis for any investment decisions.Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Show All Text

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.

Show All Text