Fund managers, capital market experts, and financial analysts collectively invest their time, knowledge, and experience to curate investment portfolios so that they can generate maximum returns for investors. All of these come with a price. 

Asset Management Companies (AMCs) or fund houses levy different types of mutual fund charges. Read on to learn about this in detail!

Mutual fund schemes are managed by Asset Management Companies, where fund managers handle investment-related decisions.

For this and other services offered, fund managers charge a SEBI (Securities and Exchange Board of India) approved fee. These are referred to as mutual fund charges.

Now that investors know about the definition of mutual fund charges, let’s learn about different types of MF charges.

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Mutual fund charges can be divided into two categories. These are discussed below,

1. One Time Charge

As the name suggests, investors have to pay a specific fee only once at the beginning of a mutual fund investment. Under One Time Charge falls Load, Entry Load, Exit Load. Read on to learn about these in detail.

• Load

Fund houses collect this fee or commission before or after a mutual fund investment. Sometimes, investors have to pay early mutual fund withdrawal charges or redemption charges if they decide to pull out mutual fund units before the maturity date.

• Entry Load

Entry load refers to a nominal charge that investors have to pay while purchasing units of a mutual fund. This charge can vary from one fund house to another.

• Exit Load

Exit load refers to a fee that investors have to pay if they wish to exit from a mutual fund scheme within a short duration. Exit load can range from 0.25%-4%. Fund houses charge these fees to retain investors until a specific time known as the lock-in period. If investors hold their investment until the lock-in period, they need not pay any exit load.

2. Recurring Charges

Recurring charges are known as periodic fees that are applicable only on a monthly, quarterly or annual basis. These types of charges include portfolio management, advertising and diverse expenses.

• Account Fee

Investors must keep a minimum balance in the trading account. Account fee is the minimum balance that the Asset Management Companies deduct from the investor’s mutual fund portfolio.

• Distribution and Service Fee

AMCs charge this fee from investors to cover the marketing and advertising of a mutual fund scheme. AMCs use these charges for promotional purposes and to inform investors about various mutual fund investment-related things.

• Management Fee

Management fee refers to the expense that Asset Management Companies charges for paying the fund manager and team of financial experts for the services offered.

• Switch Price

Times can arise when investors may wish to switch from one scheme to another. For this, AMCs charge a switch price. Here, investors can choose to transfer a mutual fund scheme partially or wholly.

Apart from these charges, investors must know about the expense ratio. Read the following section to learn about expense ratios.

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Expense Ratio

Expense ratio is one of the most popular mutual fund charges that investors have to pay to fund houses for the management of mutual fund portfolios. It is expressed as a percentage of the figure.

For instance, if an investor invests ₹40,000 in a mutual fund that has an expense ratio of 2%, then they have to pay ₹800 as an annual maintenance charge to the fund house. 

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Calculating the expense ratio is easy. AMCs use the TER formula to assess the expense ratio of each investor. Here, TER refers to the Total Expense Ratio, which is calculated by dividing the total expense during an accounting period by total fund assets and multiplying by 100.

Total Expense Ratio = (Total costs of the scheme during the period / Total Fund Assets)*100

TER reflects the cost of running a mutual fund scheme in accordance with the total value of assets under management.

Let’s understand it with the help of an example,

Suppose an investor invests ₹50,000 in a mutual fund that has a 2% expense ratio.

Here, the investor has to pay ₹1000 for managing the investment.

If the fund earns 10% and has a 2% of TER, then it generates a return of 8%.

AMCs report the NAV (Net Asset Value) of investors after deducting expenses and fees. Hence, investors must know about the rate of deduction.

In India, mutual fund expense ratios start from 0.1% and can go up to 3.5% in the case of tax savings funds.

Therefore, if this fund manages assets worth ₹10 lakh and fetches fees and charges from fundholders worth ₹15,000, then the expense ratio is 1.5%.

Hence, according to the TER Formula,

Total assets under mutual funds X = ₹1 crore,

Administrative costs = ₹1 lakh,

Other expenses = ₹50,000.

Expense ratio = Total Expenses/Total Assets= ₹1.5 lakh/1 crore = 1.5% of your Investment Value

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