When investing in an Indian mutual fund, you combine your funds with other investors to purchase a diverse portfolio of securities that a mutual fund company manages. As with any service-based business, mutual fund companies charge fees for managing the portfolio, including fund management fees, registrar fees, agent commissions, and marketing expenses. These charges are reflected in the total expense ratio, reported daily as an annualized percentage of the fund’s net assets. Additionally, fees or exit loads may be charged at specific times. Understanding mutual fund fees and expenses is crucial as they can significantly impact your investment portfolio, and even a small difference in fees between two funds can add up to substantial differences in investment returns over time. By assessing expenses and making informed decisions, you can potentially boost your long-term returns and maximize your investment gains. In this blog, we will delve into the impact of mutual fund fees on your investments and provide insights to help you make informed investment decisions.

In India, there are several types of mutual fund fees and expenses to be aware of.The most common are:

Expense Ratio: When making a mutual fund investment, investors must take the expense ratio into account. Given that it represents the annual sum of money you will pay in fees to the mutual fund company, it can significantly impact your investment returns. The expense ratio accounts for a variety of operating expenses, including investment management, administrative costs, and marketing costs. The expense ratio includes several operating expenses, such as investment management fees, office overhead, and advertising costs. For instance, actively managed mutual funds typically have higher expense ratios than passively managed funds. As previously illustrated, investing Rs.10,000 in a mutual fund with a 1% expense ratio will result in annual fees of Rs.100.

Exit Load: In the Indian mutual fund market, this is a fee charged by some mutual funds when investors choose to exit a scheme partially or completely within a specific period of time from the date of their initial investment. The exit load is typically calculated as a percentage of the redemption amount and can vary depending on the mutual fund company and the duration of the exit load period. For example, if a mutual fund has a 1% exit load for exiting the fund within a year and an investor sells Rs.10,000 worth of shares within the exit load period, they’ll pay a fee of Rs.100. The fundamental goal of the exit load is to discourage investors from early withdrawals from mutual fund schemes and to lower the number of withdrawals. Therefore, investors should consider the exit load while considering their investment options and plan their investment duration accordingly.

Additional costs: When you buy or sell shares, some mutual fund companies in India charge a transaction fee or trading fee. This is typically a predetermined minimum amount set by regulatory authorities based on the investment value.

Let’s illustrate it with an example. Assume you invest Rs. 10,000 in two schemes, each generating a 10% gross return within one year. Here’s how much you’ll get after fees and expenses:

Scheme A:

You invest Rs. 10,000 and receive a 10% gross return, which means you will receive Rs. 11,000 before any fees or expenses are deducted.

You deduct the 1% expense ratio, which means you will pay the fund house Rs. 100 (Rs. 10,000 x 0.01).

Say you decide to redeem the investment before the stipulated holding term, after calculating the 1% exit load, you will pay Rs. 109 to the fund house (Rs. 10,900 x 0.01).

After deducting all fees and expenses (Rs. 11,000 – Rs. 100 – Rs. 109), you will receive Rs. 10,881.

Scheme B:

You invest Rs. 10,000 and receive a 10% gross return, which means you will receive Rs. 11,000 before any fees or expenses are deducted.

You deduct the 2% expense ratio, which means you will pay Rs. 200 to the fund house (Rs. 10,000 x 0.02).

Again you decide to redeem the investment before the stipulated holding term, after calculating the 2% exit load, you will pay the fund house Rs. 216 (Rs. 10,800 x 0.02).

After deducting all fees and expenses (Rs. 11,000 – Rs. 200 – Rs. 216), you will receive Rs. 10,752.

As you can see, Scheme A has a higher net return than Scheme B due to lower fees and expenses. As a result, it is critical to compare the fees and expenses of various mutual fund schemes before investing in them.

How, then, can the expense of investing in mutual funds in India be reduced? Here are a few tips:

• Look for low-cost mutual funds: Funds with lower expense ratios tend to have higher returns over time since you’re not paying as much in fees. Consider investing in index funds or exchange-traded funds (ETFs), which are designed to track the performance of a specific index and tend to have lower fees.
• Check for exit loads: Some mutual funds in India charge exit loads, so be mindful of this when choosing a fund. Consider funds that don’t charge or have a lower exit load period.
• Be mindful of other fees: Check if the mutual fund charges additional fees, such as a transaction fee, and factor this in when comparing funds.
• Consider investing directly with the fund company: Some mutual fund companies in India offer direct investment options that don’t charge transaction fees or commissions. This can help you save on fees over time.

By being mindful of these fees and expenses, you can minimize the costs of investing in mutual funds in India and potentially increase your long-term investment returns.