Beware Of Loads And Expenses In MFs
Mutual funds (MFs) are known to be quite beneficial for investors because they receive the full support of investment managers who have considerable expertise in the industry, thereby eliminating chances of incurring losses almost completely. These managers are considered to be highly paid individuals who work for fund houses that require equally high costs to maintain operations. As all these costs are borne by the investors, knowing a few things about the expenses incurred by mutual funds becomes essential.
An asset management company (AMC) must clearly state in the offer document the investment and advisory fees that would have to be paid. In India, an AMC can charge management fees of 1.25% on the first Rs 100 crore of weekly average net assets of a scheme, or 1% on weekly average net assets for more than Rs 100 crore. Fees are to be calculated on the basis of net assets and not unit capital. Net assets could be either more or less than unit capital and are subject to investment performance as well as expenses charged on a mutual fund scheme.
These expenses can also be charged on a fund by way of agent commission, marketing expenses, brokerage cost, audit fees, fund transfer expenses, service tax, among others.
Types of loads:
As AMCs incur expenses to float a fund, they meet them by collecting a percentage of fees -- known as loads -- from investors
This is a fee that is assessed when an investor sells certain classes of fund shares before a specified date. A deferred load usually moves horizontally or even downwards until it eventually drops to zero.
This is a fixed rate collected by an AMC upon the purchase of a fund and it is usually a percentage of the amount invested. Some AMCs charge entry loads exclusive of VAT.
This is a fixed rate charged by an AMC upon the sale of an investor's share or investment. Unlike the entry load, the exit load is based on the holding period of investment. For example, holding for less than a year can have 2% as exit load, or holding between one year and two years can have an exit load of 1%.