What are Mutual Fund Charges?

Mutual fund charges refer to costs levied on investors by fund houses for management of their money. These charges include marketing and transactional costs related to day-to-day management of buying and selling securities.The charges are approved by market regulator SEBI, and knowing them would help you in making an informed decision.

• Entry load This refers to charges paid by you, as an investor, when you invest in a mutual fund scheme for the first time. Designed to cover distribution expenses borne by the fund house during promotion of a particular scheme, this charge was waived off in 2009 by SEBI for all funds.So, at present, you don’t need to pay any entry load when you invest in a particular fund for the first time.
• Exit load This is the charge which you need to pay when you redeem your mutual fund units within a year of investment. It means if you exit within a year of investment in a particular mutual fund, you need to pay certain charges in the form of an exit load.This is levied to discourage investors from quitting their investment. Exit load varies across fund houses and schemes. While some charge a flat fee, others charge on the basis of holding period, i.e., you need to pay higher charges if the holding period is less and vice-versa.You can contact executives from the fund house or your advisor to know more about this charge.
• Expense ratio This is the most essential mutual fund charge that you need to keep in mind. Expense ratio is arrived at by dividing the total expenses of a fund by its asset under management (AUM). Expressed as an annualised percentage of a fund’s net assets, expense ratio for equities is capped at 2.25% while for debt it’s 2%.Expense ratio for regular plans are higher than their direct counterparts. This is because in the latter, the fund house saves on commissions needed to be paid to intermediaries.  Note that the quantum of expense ratio has an impact on the overall returns from funds in the long run.A high expense ratio can eat into the returns from the fund. Therefore, before investing in a fund do check out this ratio.

While mutual fund expenses, particularly expense ratio, is something to look out for before investing in a fund, it shouldn’t be the only guiding factor.
You must check out the fund’s objective, its fundamentals and long-term performance vis-à-vis its peers and benchmark indices before investing. It’s advisable to opt for a fund with robust fundamentals and a consistent track record in the long-term.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.