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Mutual Fund Expenses
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In the course of offering its services to Investors, Mutual Funds incur expenses which are actually to be borne by the pool of investors.
Unlike other similar products, such as Unit Linked Insurance Policies (ULIP) or Portfolio Management Services (PMS), the expenses are cheaper and more transparent and hence Mutual Funds are one of the most preferred product when it comes to Investing in India.
Perhaps the only product that compete neck on with Mutual Funds is the National Pension Scheme.
The expenses are calculated in the form of basis points.
One basis point is one-hundredth of a percentage point.
The expenses of the scheme, such as the Expense Ratio, are charged to the fund in the form of a small reduction to the Net Asset Value (NAV).
Apart from this, there are several other forms by which the Mutual Fund charges its investors.
For example, Investors who pre-maturely exit a scheme might have to face an Exit Load etc.
The exenses incurred by a DIRECT plan of schemes are lower than that of the REGULAR plan.
Read DIRECT plan vs REGULAR plan for more details on how DIRECT plan investors get benefited.
In 2012, SEBI allowed mutual funds to charge 20 basis points of assets under management of the scheme in lieu of exit loads, or the sum mobilised from investors when they offload holdings.
2018 proposal
In case of open ended equity and balanced schemes, the additional expenses charged are significantly higher than the actual credit back of exit load to the scheme. In comparison, these additional charges are lower in the case of open-ended debt schemes.
Across all open-ended equity and balanced schemes, an average exit load of around 5 basis points has been credited back whereas an average additional expense of 18-20 basis points has been charged to such schemes.
The regulator is also looking to amend the regulatory framework to enable disclosures related to mutual funds in investor-friendly electronic form.
Under this, mutual fund houses need to prominently disclose on a daily basis the total expenses charged to customers for all schemes under a separate head on their websites. Besides, they need to communicate to investors latest net asset value (NAVs) through SMS following a request from the unitholder.
Related Topics
- Assets Under Management (AUM)
- GROWTH option vs DIVIDEND option
- Mutual Fund Distributor
- SIP vs Lumpsum Investments
- One Time Manadate in Mutual Funds
- Open-ended, Close-ended and Interval schemes
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