What Are Hidden Charges In Mutual fund?
Nothing is free in this world, same applies to mutual funds. There are some hidden charges in mutual fund. The trick is that hidden charges are charged on your returns and not investments. Any charges which eat up our returns we need to really think about it.
Before we start we need to understand some term associated with mutual funds. These are as follows
the term associated with mutual funds
TER ( Total expenses ratio)
it is a total expense incurred by mutual funds & it is charged to investor lower the expense ratio is better
AUM( asset under management)
it is the total market value of investment/ assets in a mutual fund
NAV (net asset value)
NAV is value of 1 unit of respective scheme of mutual fund
Entry / Exit load
Mutual funds charge some amount while entry or exit from mutual fund called entry & exit load
Hidden Charges In Mutual fund
Total expenses ratio (TER)
AMC’s charge some amount towards our investment for there regular expenses like Office, employee payment, agent commission, administrative expense etc this called total Expense ratio. This charge is between 0 to 2.5 % but this will affect our returns as higher expense ratio means lower returns. This is one of the biggest hidden charges in mutual fund.
TER is charged a certain percentage of AUM on annual basis. The ratio has guidelines from Sebi & AMC need to follow them. So, for actively managed equity funds, the expense ratio allowed by SEBI is a maximum 2.5 percent for the first 100 cr (average weekly net assets), 2.25 percent for next 300 crores, 2 percent for the subsequent 300 crores and 1.75 percent for the balance corpus.
For debt funds, the expense ratio allowed is 0.25 percentage points lower than equity funds. Within these limits, the expenses are fungible. That is, funds may allocate costs as they like between their fees and other expenses.
Besides this, mutual funds have been allowed to charge up to 0.30% more if 30 percent or more of their new inflows come from locations beyond the top 15 cities. A proportionate charge is allowed if the new inflows from the B15 (beyond top 15) locations are less than 30 percent.
Service tax on fund management charges is also passed on to investors, which adds to the expense ratio.
Net Asset Value(NAV)
It’s calculated by total assets less total liabilities to divide by units outstanding Example:- total assets 100 lib=12 & Outstanding units 24 then (100-12)/24= 3.66
Which means if you invest 20 then we get 20/3.66= 5.46 unit we will get so that total outstanding unit will become 24+5.46 = 29.46
In India, there is no entry load for investing mutual funds. There is 1% exit load on equity funds if redeemed before one year but some of debt & liquid fund have no entry & exit load
Some investments attract income tax, so we need to consider the tax on investment for good return. investment in mutual fund is always best option to beat the inflation. There is another benefit is that we don’t have to pay capital gain tax if we redeem funds after one year. There is mutual fund called ELSS fund which gives us tax benefit with lowest lock-in period with tax-free returns.
Must Read: Best ELSS Tax Saving Mutual Funds To Invest
Debt mutual fund attract tax if you have short-term gain(less than 36months) it will be taxable as per your income tax slabs 5%, 20%, 30% etc. If you have long-term gain (more than 36month) then it is 20% considering indexation
Whenever we invest in mutual fund need to analyze following points
- Fund returns after the TER
- AUM of the fund
- Entry and exit load for investment decisions
- Taxes which eat our investment
Tough, you cannot avoid hidden charges in mutual fund, but you can choose mutual fund which has minimum charges.