Costs Involved while Investing in Mutual Funds

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Before you begin with Mutual Fund Investments, it is essential that you familiarize yourself with all kinds of expenses and costs that you will be expected to bear.

Fund Houses impose several charges on Mutual Funds to be incurred by individual investors.

The exact nature of these charges vary from one-time charges to recurring charges.

If you have been researching Mutual Funds Online you would be aware that some of the charges previously levied have now been discontinued as per SEBI norms.

Costs Involved while Investing in Mutual Funds
You need to be aware of these charges to make the right decision about which mutual funds to pick and invest.

It is always advisable to choose a mutual fund investment after duly considering the returns and expenses that each mutual fund scheme would bring for you.

Given below is a list of costs involved in mutual funds in India:


1. One-time costs – As the name suggests, these costs are only to be borne once per mutual fund investment. Mentioned below are the two types of one-time costs that mutual fund investors are expected to bear:
  • Transaction Charge – Applicable from an update dated August 2011, the Securities and Exchange Board of India (SEBI), has allowed the AMCs to collect a nominal amount as a one time transaction charge.

    This charge is only applicable in cases where the investor has made an investment through an Asset Management Company (AMC).

    An AMC is an intermediary mutual fund distributor which assists investors while making investments so as to maximize their diversification prospects. AMCs are authorized to charge an amount of Rs.150 for first time mutual fund investors.

    For existing investors, i.e. the ones who have invested in mutual funds before, they are required to pay a sum of Rs.100 as the transaction fee.

    The transaction fee is only to be charged for investments that are more than Rs.10,000. The subscriptions that are less than the amount of Rs.10,000 are not be charged any transaction fee.

    Whereas in the particular cases of Systematic Investment Plans (SIPs), where the total investment is over Rs.10,000, the transaction fee of Rs.100 will be payable in four equal installments.

    These four installments will begin from the second installment right through to the fifth installment.
  • Exit Load – Exit Load refers to the amount payable by the mutual fund investor when he/she decides to sell those funds after only a short period of having invested, or any time before fund maturity.

    This is essentially a way to prevent investors from exiting a mutual funds scheme before a sufficient period of time has lapsed. The Exit Loads vary depending on the mutual fund schemes and their holding period. Though it generally falls in the range of 0.5% to 3 %.
  • Entry Load - Entry Load refers to the charges levied when units are being purchased. The mutual fund house would sell the unit price higher than the Net Asset Value. These are usually deducted from the NAV at the time of the investment in the mutual fund. Before being abolished by SEBI in August 2009, the Entry Loads were as high as 2.25 per cent for equity funds.
2. Recurring charges – Recurring Charges are levied on Daily Net Assets of a specific mutual fund scheme. These rates are determined by the regulator and mutual fund companies cannot charge more than the structure set forth.

Recurring charges are deducted every day from the Net Assets of the mutual fund.

Also, the Net Asset Value is announced after adjusting these expenses.

Also, the exact rate of expense ratio charged varies from one scheme to another and one fund house to another, but the broad categories are fixed by SEBI for TER of Debt Schemes and Equity Schemes.

The higher the net assets of the investor, the lower will be the TSR (Total Shareholder Return), whereas lower the net assets, higher will be the expense ratio charged.

It is only after taking into consideration the TER (Total Expense Ratio) and other expenses that the NAV of the fund is declared.

So, before investing in any mutual funds online, it is always advisable to consider the above mentioned costs and check the returns using a mutual fund calculator. Mutual Fund Calculators can be used to figure out the exact TSR that will be charged on a potential investment.