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Mutual fund investments provide an accessible and diversified way to create wealth in the long term. Since they’re market-linked, they have the potential to generate returns that are higher than most traditional investment options. However, it is crucial for investors to understand the various mutual fund fees that they’re likely to incur with their investments. In this article, we’re going to look at the various charges that mutual fund houses often levy and what they mean.
Key Takeaways
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Mutual fund costs mainly include the expense ratio, transaction charges, and exit load.
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Direct plans are cheaper than regular plans due to lower ongoing charges.
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SEBI sets clear limits and rules to keep mutual fund fees transparent.
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Knowing these charges helps investors choose funds more wisely.
What are the Charges Associated with Mutual Fund Investments?
When you invest in mutual funds, a few key charges influence the overall cost and, ultimately, your returns. Understanding these fees helps both new and seasoned investors make better decisions. The main charges include the expense ratio, transaction charges, and exit load. Here’s how each one works.
1. Expense Ratio
The expense ratio is an annual fee expressed as a percentage of the fund’s daily net assets. It covers the cost of running the fund—everything from fund management and administration to essential operational expenses.
A higher expense ratio reduces your effective returns, while a lower one helps you keep more of what you earn. Although fund houses can set their own ratios, they must remain within the limits defined by regulations.
Actively managed funds usually carry higher expense ratios than passive funds because of the additional research and active decision-making required.
2. Entry Load
An entry load refers to a fee imposed when investors make their initial investment in a mutual fund, intended to cover the distribution costs for the asset management company. Before 2009, this fee varied across different fund houses in India. However, current SEBI regulations forbid fund houses from charging an entry load, ensuring that investors are not subjected to this fee, thereby promoting transparency and reducing the overall cost of investing in mutual funds.
3. Transaction Charges
Transaction charges apply when you buy or sell units worth ₹10,000 or more. For new investors, this fee can go up to ₹150, while existing investors may be charged up to ₹100. These charges help cover processing and administrative efforts involved in the transaction. However, SEBI recently announced that transaction charges will no longer be applicable.
4. Exit Load
Exit load is a fee applied when you redeem your investment before completing the scheme’s specified holding period. Its purpose is to discourage early withdrawals and offset costs associated with premature exits.
Most funds charge around 1% of the redemption value, but the exact amount depends on the fund’s policies. Some funds don’t charge an exit load at all, which can be beneficial for investors who prefer flexibility.
Why Do Regular Plans Have a Higher Expense Ratio?
Asset management companies often have two different kinds of plans on offer for the same mutual fund - a direct plan and a regular plan. In a direct plan, you invest in a mutual fund directly through the AMC. In a regular plan, you invest in the fund through a distributor or agent affiliated with the asset management company. Both the direct and regular plans for a mutual fund are similar in all aspects, from the portfolio of assets to the fund manager and their strategies. They only vary in one aspect - the expense ratio. Regular plans often have higher expense ratios than direct plans of the same mutual fund. The primary reason for this is the involvement of the distributor or agent in the regular plan. Expenses such as distribution costs and agent commissions are added to the expense ratio of regular plans, making them more expensive than the direct plan.
What is the Maximum Expense Ratio Limit in India?
The SEBI has given asset management companies the freedom to set mutual fund expense ratios. That said, the AMCs cannot exceed the maximum expense ratio limits as specified under Regulation 52 of the SEBI Mutual Fund Regulations. The maximum expense ratio that AMCs can levy varies depending on the total assets under management and the type of fund. The more assets a fund has under its management, the lower the expense ratio will be. Here’s a table outlining the limits specified by SEBI.
Difference in Mutual Fund Charges for Direct and Regular Plans
Direct and regular plans offer the same portfolio but differ in how mutual fund charges are applied. Direct plans usually have a lower expense ratio because they exclude distributor commissions.
Regular plans include these costs, making them slightly more expensive. Over time, even a small difference in charges can influence the final returns an investor receives.
SEBI Guidelines for Mutual Fund Charges
SEBI sets clear rules to ensure mutual fund charges remain transparent and fair for investors. These guidelines specify the maximum expense ratio a fund can levy, outline limits for transaction fees, and prohibit practices like entry loads. SEBI also requires full disclosure of costs so investors can compare funds easily and understand how different charges may affect long-term returns.
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Assets Under Management (AUM) |
Debt Mutual Fund Expense Ratio Limits |
Equity Mutual Fund Expense Ratio Limits |
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Up to ₹500 crore |
2.00% |
2.25% |
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On the next ₹250 crore |
1.75% |
2.00% |
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On the next ₹1,250 crore |
1.50% |
1.75% |
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On the next ₹3,000 crore |
1.35% |
1.60% |
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On the next ₹5,000 crore |
1.25% |
1.50% |
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On the next ₹40,000 crore |
0.05% reduction in the expense ratio for every ₹5,000 crore increase in the daily net assets |
0.05% reduction in the expense ratio for every ₹5,000 crore increase in the daily net assets |
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Exceeding ₹50,000 crore |
0.80% |
1.05% |
Conclusion
Mutual fund fees and expenses are integral components of mutual fund investments in India. These charges have a major impact on the returns you get from your investments. The lower mutual fund charges are, the higher your returns are likely to be. That said, when choosing a fund, make sure to consider other factors like investment objectives, risk profile, past performance and the fund manager’s expertise, in addition to mutual fund charges. This will allow you to make informed investment decisions that are in line with your financial goals. Open a Demat Account on Angel One today and explore various investment options.
