Mutual Fund Fees, Charges and Expenses in India

When investing in mutual funds, it’s natural to focus on returns. But have you considered the fees and charges that come with them? These costs may seem small but can significantly impact your overall returns in the long term. 

Some charges have a bigger impact than others, so knowing what you’re paying for can help you choose funds wisely and maximize your returns. Let’s explore the key mutual fund fees, charges and expenses and why they matter for your investments!  

What are the Mutual Fund Fees and Expenses?  

When you invest in mutual funds, there are certain costs associated with managing and maintaining the portfolio. These charges are known as the mutual fund fees and expenses. The more actively managed the fund, the higher the expenses required. Furthermore, the cost and expenses vary depending on the type of fund. Even a slight difference in expense makes a substantial difference in returns over the long term. 

For instance, consider you invest ₹1,00,000 in two mutual funds for 20 years, both giving 12% returns, but with different expense ratios:  

Fund A (1.5% Expense Ratio) – Grows to ₹7.44 lakh  

Fund B (0.5% Expense Ratio) – Grows to ₹9.03 lakh 

So, even a 1% difference in fees cost you ₹1.59 lakh overtime. This makes it crucial to consider a lower expense ratio for higher returns.  

Types of Mutual Fund Fees and Charges  

When investing in mutual funds, it’s important to understand the various mutual fund fees and charges that can impact your returns. By knowing the different types of mutual fund fees and expenses, you can make informed investment decisions and choose cost-effective funds that maximize your returns.  

Entry Load: Definition and Current Status   

Entry load was the charge investors had to pay when they invested in a mutual fund for the first time to cover the distribution costs incurred by the Asset Management Company (AMC) to promote the scheme. However, in 2009 SEBI abolished this charge prohibiting fund houses from imposing entry loads on investors.  

Exit Load: Purpose and Applicability   

An existing loan is the fee that the investor must pay if they withdraw from a mutual fund within a specific period. The fee is charged if an investor withdraws within 1 year from the date of investment. The exit loan is typically about 1% of the redemption value. This fee is charged when investors withdraw from mutual funds. It is used to discourage premature withdrawals and limit withdrawal volumes. Also, no exit loan is levied if an investor withdraws after one year of investments in the scheme.   

Expense Ratio: Components and Impact on Returns  

Expense ratio is the annual fee charged by the fund for managing the portfolio. It covers various costs, including marketing and distribution expenses, auditing fees, brokerage charges, compliance costs, administrative fees, custodial charges, and legal expenses.  The expense ratio directly affects your mutual fund returns since it is deducted annually from your investment. It represents a percentage of the fund’s daily net assets and covers the cost of fund management. A higher expense ratio reduces your net returns. Thus, it is important to weigh in the expense ratio before you invest in any fund.  

For instance, you invest ₹10 lakh in two mutual funds for 20 years at 12% annual returns:  

Fund A (1.5% Expense Ratio) → Final value: ₹74.08 lakh  

Fund B (0.5% Expense Ratio) → Final value: ₹90.39 lakh 

A 1% higher expense ratio costs you ₹16.31 lakh over time.  

Transaction Charges: When and How They Apply  

In India, transaction charges are levied when you sell or buy units whose value exceeds ₹10,000. Thus, whenever an investor buys or sells any unit above ₹10,000, they are liable to pay transaction charges. As per Securities and Exchange Board of India (SEBI), mutual funds can charge a maximum of ₹150 for new investors if their transaction value exceeds ₹10,000. For existing customers, the maximum transaction charge is restricted to ₹100.

Additional Costs: Custodian and Registrar Fees  

Apart from the expense ratio, mutual funds also have custodian and registrar fees, which cover operational and administrative expenses.  

Custodian Fees: These are charged for safekeeping and managing the fund’s securities. Custodians ensure that all assets are securely held, and transactions comply with regulations.  

Registrar Fees: These cover costs related to investor record-keeping and account maintenance.  

Though these fees are usually a small fraction of the total cost, they impact overall fund expenses, making it important to choose funds with affordable cost structures.  

Also Read: Types of Mutual Funds: Categories Explained for Every Investor

How Mutual Fund Charges Affect Your Investment Returns

Mutual fund charges play a critical role in your net returns, as they impact your investment over the long term. There are many charges related to mutual funds, but few charges impact returns more than others. Thus, it is important to assess these charges before one invests in any mutual fund. 

Expense Ratio: The expense ratio is the annual fee charged by the fund for management and administration. Even a small difference in the expense ratio can significantly impact long-term returns due to compounding.  

Expense ratio has the biggest impact on your returns. Thus, always compare expense ratios before investing. 

Exit Load: This is charged when you redeem units before a specific period (withdrawn within a year). If you plan to invest for the long term, this fee may not impact you much. However, if you need liquidity or might withdraw early, check the exit load before investing. 

Transaction Fees & Other Charges: These fees include custodian fees, registrar & transfer agent (RTA) fees, and brokerage costs. These are usually small and one-time costs but still contribute to the total expenses. While not as significant as the expense ratio, they should be considered in cost-sensitive investments.  

Also Read: Mutual Fund Returns: What They Are & How to Calculated

Conclusion  

Mutual funds fees may seem small, but they can significantly impact your returns over time. A high expense ratio or unexpected exit load can significantly reduce your returns, so it’s important to understand and compare costs before investing. Always check the fee structure and make informed choices to get the best out of your investments.