Hello Readers!
If you are asked a question, how much of your investment in mutual funds go to intermediates directly or indirectly, what will be your answer?
Well, that’s a tough question to answer, but you will be surprised to know that right from effective returns to non-biased advice in your investment, are all connected with this answer. In the last some years there are some major revisions done in the commission and fee structure of mutual funds by the mutual fund industry.
There have been many changes made to regulate the limit in mutual fund expenses and distributor’s commission, separation of advice from distribution, and charges for value-added services such as financial planning.
Through this article, we will be discussing everything about the commission and fee structure of mutual funds in the simplest possible way.
Why it is necessary to know the charges in Mutual Funds?
Generally, it has been observed that investors do not bother much about the charges in mutual funds, as the differences between the best and the worst ones are just 1-2% per annum. However, one shouldn’t neglect the power of compounding. Even a difference of 1% in fee adds up to a good 30% in the long term.
And that’s why it becomes necessary to know about the charges involved in your mutual fund investments.
DIFFERENT TYPES OF COMMISSION AND FEES
Here in this article, we will discuss three kinds of charges – distributor’s commissions, one-time charges, and value-added service charges.
Distributor’s Commissions
This is a part of the expense ratio of mutual funds.
TER or Total Expense Ratio, also known as Net Expense Ratio, is defined as a kind of operational costs on mutual funds, charged by the AMC (Asset Management Company), to the investors. These charges are applicable to both Regular Plan of Mutual funds and Direct plan of Mutual funds. TER is considered as the percentage of assets that is payable to the fund or asset manager (i.e. AMC).
This expense ratio is charged a bit more in Regular plans, than Direct plans. This is because a Regular plan in mutual funds involves a middleman, like a distributor, broker, or agent while in the direct plan of mutual funds, there is no involvement of middleman. For example, in general, for equity mutual funds, the expense ratio for direct funds is around 1% less than regular funds.
SEBI (the regulating body of mutual funds) reduced the upper limit of expense ratio for all open-ended equity-oriented funds. It has specified expense ratio slabs based on the asset under management (AUM) of the fund house. As per these regulations, the total expense ratio (TER) allowed is 2.5% for the first Rs.100 crore of average weekly total net assets, 2.25% for the next Rs.300 crore, 2% for the next Rs.300 crore and 1.75% for the rest of the AUM.
The limit for debt funds is 2.25%.
The commission that distributors get from fund houses is part of this expense ratio. However, ‘investment advisor’ or ‘registered investment advisor’ don’t get any commission from fund houses, as they generally recommend direct mutual funds.
One-Time Charges
There is some kind of charges that are charged only one time in mutual funds, at the start of the investment or at the time of exit from the investment. These charges include entry load (not applicable now), exit load, and transactional charges.
- Entry Loads– Entry loads are the charges that are levied when the units are purchased. After the introduction of TER, mutual funds are not allowed to charge entry load.
- Exit Loads– Exit load is a fee charged to an investor for exiting or leaving a scheme. After the introduction of TER, the exit load has now got concentrated only on some debt funds. Generally, the fund charges fees between 0.1% and 3% depending on the holding period. No exit load is charged beyond the holding period.
- Transaction Charges: These are one-time charges levied on the investment worth more than INR 10,000 and paid to distributor or intermediary who is selling the fund.
Value-Added Services
As per SEBI regulation, registered advisors cant earns any commissions from fund houses, as they are mainly focused on offering of Direct plans of mutual funds, that have low expense ratio than Regular plans of mutual funds.
Thus, these registered advisors charge for value-added services such as financial planning, fund recommendation, and portfolio advisory, to their clients. The charges charged by these advisors are mainly calculated on the basis of portfolio performance or asset under management. Typically, advisors charge 0.25-1% of assets under management as a fee.
That’s all an investor needs to know about commissions and fees, charged in mutual funds.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).