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Mutual Fund Fees and Charges in India

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Mutual Fund Fees and Charges in India
February 26, 2024

Table of Content

 

Mutual Funds in India offer a wide range of benefits for investors, such as professional money management and expert analysis. To provide these services, the Asset Management Companies (AMCs) and fund managers charge a fee that covers their compensation and other expenses. These fees are approved by the Securities and Exchange Board of India (SEBI). The fund managers and financial analysts work diligently to manage the funds and minimize market risks. Their expertise, experience, and passion are essential to ensure successful investment outcomes.

What are the Charges Associated with Mutual Fund Investments?  

Potential investors should carefully evaluate the funds they are considering in order to avoid any unanticipated charges. Commonly, investors will face two types of charges - one-time charges and recurring charges, though there may be other variations to these fees.

  • One Time Charge: An initial fee that must be paid when making a payment in an investment plan. It can also be referred to as a transaction charge.
  • Load: A commission or fee that is taken by intermediaries such as AMCs.
  • Entry Load: A nominal fee that is taken when an investor purchases fund units. This was deferred by SEBI in August 2009 for mutual funds.
  • Exit Load: A fee levied on investors when they redeem their fund units. The rate of the fee can range from 0.25-4% and is determined by the fund houses. The fee encourages people to stay in the fund for a specified period of time. For example, if a fund is priced at Rs.500 and the investor wishes to redeem within the lock-in period, they will have to pay an exit load of Rs.5 per unit if the exit load is 1%. No exit charges apply if the investor redeems their units after the lock-in period.  
  • Recurring Payment: This is the charge that the investor pays at regular intervals such as daily, quarterly, or yearly. This fee is usually for portfolio maintenance, advisement, advertising, and other costs. It can also be referred to as the periodic fee.
  • Management Charge: This expense is applied for the payment of the fund manager and the management of the investment. This cost is not included in the other expenses.
  • Account Cost: Some Asset Management Companies may impose a fee on the investor for maintaining their account if the minimum balance requirement is not met. It is then taken from the investor's portfolio.
  • Distribution and Service Fee: This fee is charged from the investor for the marketing, printing, and distribution of the AMC to keep the investor up to date with various marketing campaigns. It also gives the fund manager adequate funds.
  • Switch Price: Mutual funds which offer the option of switching allow investors to transfer all or part of their investments from one scheme to another. This process is referred to as 'switching' and the price associated with it is known as the 'switch price'.

Expense Ratio

The expense ratio, which is a fee paid by individual investors to the fund house, motivates asset managers to deliver excellent returns. This is because the better they perform, the more reputation and satisfaction the Asset Management Company (AMC) and fund manager will gain. As a result, there will be more investors, thus increasing the Assets Under Management (AUM). Nonetheless, all these come at an operational cost. Therefore, it is important for investors to understand the various mutual fund charges and their relevance.

How to calculate Expense Ratio

Fund houses employ the Total Expense Ratio (TER) formula to determine the cost per investor. The TER is calculated by taking the total expense charged for a particular period and dividing it by the fund's total net assets, then multiplying the result by 100.

So, for a mutual fund scheme with an AUM of Rs. 500 crore and expenses of Rs. 10 crore, the expense ratio will work out to: 10 crore / 500 crore x 100 = 2 %.

This means the investor must pay the AMC 2% as expense ratio or mutual fund charges. This is deducted daily until the investors redeem the mutual fund scheme units.

An example of how it works daily: Supposing the expense ratio of a mutual fund scheme is 1.50%, and the investors’ investment in this fund is Rs 1 lakh. Let us assume the fund's value grows to Rs 1,00,400 the next day and Rs. 1,00,200 the day after. Thus, the investor pays these expense ratios the following two days:

Day 1: 1.5% / 365 x 1,00,400 = Rs. 3.87.

Day 2: 1.5% /365 x 1.00,200 = Rs. 3.86.

The Asset Management Company charges a fee regardless of the outcome of the mutual fund scheme. This fee is deducted from the investor's returns on a daily basis and thus reduces the overall returns for the investor.

Why Do Regular Plans Have a Higher Expense Ratio?

Mutual fund schemes offer two plans: regular and direct plans. In the direct plan, you buy the mutual fund directly from the AMC, incurring no commission fees, and therefore, lower costs. On the other hand, regular plans require a middleman like a financial advisor and a commission fee is charged, making it more expensive. The CAGR return is higher for direct plans, leading to more profits.

The Net Asset Value (NAV) of funds under direct plans is higher than those under regular plans. This means the cost of units of a mutual fund in regular plans will be less. However, it is important to note that it is the value of the assets of regular plan that is lower, and not necessarily the price.

What Is the Maximum Expense Ratio Limit in India?

According to SEBI regulations, the total expense ratio of an asset management company or fund house should not exceed the specified threshold.

AUM of a mutual fund scheme

Maximum TER for equity- oriented MF schemes

Maximum TER for other schemes (excluding fund of funds, ETFs, and index funds)

More than Rs. 50,000 crore

1.05%

0.80%

Between Rs. 10,000 crore and Rs. 50,000 crore

TER reduces by 0.05% for every increase of Rs 5,000 crore in AUM.

TER reduces by 0.05% for every increase of Rs 5,000 crore in AUM.

Between Rs. 5,000 crore and Rs. 10,000 crore

1.50%

1.25%

Between Rs. 2,000 crore and Rs. 5,000 crore

1.60%

1.35%

Between Rs. 750 crore and Rs. 2,000 crore

1.75%

1.50%

Between Rs. 500 crore and Rs. 750 crore

2.00%

1.75%

Up to Rs. 500 crore

2.25%

2.00%

 

SEBI allows fund houses to add an extra 0.30% to the existing limits when selling mutual funds in cities outside of the top 30. This encourages investment in smaller cities in India.

Difference in mutual fund charges for direct and regular plans

Mutual funds come in two forms: direct and intermediary. Investing directly from the AMC is cost-efficient as there's no commission to pay. However, market expertise is needed to choose the right fund to meet goals, making intermediaries an important part of the process.  

Seek out a qualified intermediary for guidance if you lack market knowledge. Regular funds can be the same, but they will come with an additional expense due to the commission to the distributor. The advantages of regular plans include KYC and convenience.

SEBI Guidelines on Mutual Fund Charges

SEBI amended the mutual fund charges guidelines in 2012, introducing the basis point (bps) expressed as a percentage, which is 1/100th of 1%. SEBI also issued mandatory expense ratio limits for equity and debt funds. These limits are:

AUM Range (in crore rupees)

Equity-Oriented Mutual Funds (Maximum TER)

Other Mutual Funds (Maximum TER)

>50,000

1.05%

0.80%

10,000 – 50,000

Reduces by 0.05% for every increase of Rs. 5,000 crores

Reduces by 0.05% for every increase of Rs. 5,000 crores

5000 – 10,000

1.50%

1.25%

2000 - 5000

1.60%

1.35%

750 - 2000

1.75%

1.50%

500 - 750

2.00%

1.75%

Up to 500

2.25%

2.00%

Other alternative investment options

If you want to build your wealth, as well as protect your financial future through a life cover, then ULIPs can be a good investment for you. ULIPs allow policy holders to invest in a variety of debt and equity vehicles to create a fund to support their future financial objectives.

Conclusion

Mutual fund charges should be taken into consideration when investing, as they have an effect on returns. This can also give an investor an idea of potential profits.

FAQ’s on Mutual Fund Fees

Q. What are typical fees for mutual funds?

A. Mutual fund fees in India range from 0.5-2.5% of AUM, including administrative, management, and distribution expenses.

Q. What is the fee charged by a mutual fund?

A. Mutual funds charge management, administrative, and/or distribution fees. The amount charged depends on the type of fund, the fund manager, and the services offered.

Q. Are mutual funds charged monthly?

A. Mutual funds in India have annual fees, although some funds may have semi-annual, or quarterly fees.

Q. What is an expense ratio?

A. It is the fee charged by the fund manager for managing the fund. It covers administrative, management, and distribution costs.

Q. What are the fees not included in the expense ratio?

A. Transaction costs, such as brokerage fees and taxes, are not included in the expense ratio and are paid by the investor.

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ARN: ED/12/23/6760

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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