Mutual funds investment, in the world, at present, have become the first preference of investors as a means to invest and achieve excellent returns, according to the investors’ needs, wants, wills, demands and expectations. But at the same time, mutual funds investments incur many charges, fees and costs on their investors, as a result of which the investors may create a negative image of mutual funds in their respective minds. This article aims to uncover all the costs, charges and fees related to mutual funds’ investments and make the readers understand correctly about the same.
All the people aspiring to become investors need to know some prerequisites, and do some research. All the funds that are being considered need to be compared with others on the basis of various fees and charges, keeping industry standards as benchmarks. Comparing the total expense ratio is the best way to compare various types of funds, since all of them come with different types of fees and charges.
All the investors holding mutual funds are liable to pay a fixed amount of charges, which can be termed under Mutual fund fees and expenses. A lot of costs, namely investment advisory fees, shareholder transaction costs and distribution and marketing expenses are involved when running an investment in mutual funds. Funds are passed along with these costs to all the investors in numerous ways.
There also are some best mutual funds in India out there in the market shareholder fees directly get imposed on the investors whenever buying or selling of shares is done by the investor. Moreover, all the funds have recurring, fund-wide regular operating expenses. Investors themselves eventually are supposed to pay these fees and costs since all the mutual funds pay their operating expenses from the fund assets. Though these may seem negligible, such costs can considerably decrease an investor’s earnings.
The various types of fees that an investor has to consider paying while dealing with mutual funds investments are as follows:
- Purchase fee
- Exchange fee
- Management fee
- Account fee
- Distribution and service fee
- Transaction costs
- Definition of a load
- Front-end load
- Back-end load
- Level load/low load
- No-load fund
Majority of the primary investment decisions and decisions regarding the management of the assets of the mutual funds are taken by the AMCs (Asset Management Companies). Many fees and charges like sales/agent commissions, advisory fees, marketing and selling expenses, legal and audit fees, ongoing service fees, transfer and registrar agent fees and fund administration expenses are usually procured from the investors under the name of regular operational costs and professional fund management, by the AMCs.
As a whole, all these costs and expenses, together, are known as TER (Total Expense Ratio) and is expressed in percentage as an annual charge on AUM. According to the guidelines given by SEBI, TER is supposed to be inversely proportional to AUM, i.e. as AUM increases, TER needs to decrease. The net of all liabilities including TER is known as the NAV (Net Asset Value) of a scheme of a mutual fund, and therefore lower TER outcomes in higher returns and vice versa. SEBI has included service tax under ‘cost to investors’ in a recent circular, (earlier paid by AMCs).
SEBI, in recent times, has introduced many helpful changes under TER. One of the latest circulars published by SEBI allows AMCs to charge an extra amount of 30 bps of TER, the condition being that new inflows from beyond top fifteen metropolitan cities are 30% or more of fifteen per cent of the scheme’s AUM (year-to-date) or the total of new inflows in the scheme, whichever is higher. It is okay if TER goes up to about 2.8% instead of the regular 2.5% for equity schemes.
If the inflows coming from beyond top 15 metropolitan cities are converted within a time period of an annum, counting from the date the money was invested by the investor, then the additional TER will be clawed back. It was also mentioned in the circular that at least 2 bps shall be yearly set apart by mutual funds on total assets (daily) within the maximum limit of TER for investor awareness/education initiatives.
Also, there are many other costs that need to be taken into consideration by the investors, when it comes to mutual fund investments. A few indirect costs, which an investor is supposed to bear throughout the investment tenure, also exist. For instance, an investor has to pay for opening a demat account, for maintenance of the account, and brokerage charges, in exchange traded funds (ETFs). A mandatory security transaction tax is required to be paid by the investors while buying or selling stocks, when it comes to mutual fund investments.
In the end, it can be concluded that lower costs reflect the operational efficiency of a mutual fund house. All other factors being the same, an investor is supposed to ideally invest in a scheme which has a more affordable TER compared to other competitors as higher expenses reduce returns of the fund.