Mutual Funds are investment instruments wherein a number of investors sharing a common financial goal invest money in a pool which is managed by a professional fund manager. This fund manager, in turn, invests the sum into the market and picks different instruments for the purpose – into company stocks, shares and bonds. Since mutual funds essentially encompass different investors, the overall risk of the investment is reduced. Investing in the market is no child’s play; you need subject expertise, industry experience and a passion and penchant for financial instruments. If you want to invest in the market for wealth creation, but lack large sums of money, the expertise or the inclination and time to research, mutual fund investments are the way to go. The Securities and Exchange Board of India (SEBI) regulates mutual funds in India.
Asset Management Company and Fund Managers
This professional fund manager we are talking about works with a team of financial analysts and market experts in an Asset Management Company (AMC). Last year was a watershed year for AMCs, as they grew at an exponential pace. Considering that mutual funds are a growth space in India, AMCs are bound to grow further.
Since this team of fund managers and financial experts under AMC is facilitating the investment for you, the company charges a SEBI-approved fee for their services. Hence, some of the charges and fees you incur are one-time, while others (like the ones accounted for in the Expense Ratio) are recurring in nature.
Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are allowed to charge certain operating expenses – such as sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets. This is called ‘Expense Ratio’, the cost of running and managing a mutual fund charges to the scheme itself, but within the limits specified under Regulation 52 of the SEBI Mutual Fund Regulations. Expense ratio is calculated by dividing the total expenses incurred in the management of a scheme by the AUM (assets under management) of the scheme.
Some of these charges include:
- A management fee is an expense coined for paying your Fund Manager for his services and the management. This does not come under Other Expenses.
- An account fee that some AMCs charge investors for maintaining their account if they do not meet the minimum balance criteria. They deduct this from the portfolio of the investor.
- Distribution and Service Fee that the AMC incurs for marketing campaigns.
- Mutual fund expense ratio also includes compliance cost and shareholder service cost of the scheme.
Therefore, the returns which an investor earns on his/her mutual fund investment is the residual and final return, i.e. it is the return adjusted for various mutual fund charges including the expense ratio.
It is paid by an investor at the time of redeeming mutual fund units. This charge seeks to discourage investors from exiting the scheme, and are applied at the discretion of the fund manager/AMC, subject to a maximum limit of 7%
Latest Developments and Trends
The SEBI has now intervened to prevent any overcharging by (Asset Management Companies) AMCs to ensure fees charged for direct mutual fund plans under various heads do not exceed those charged for regular plans.
Previously an entry load was levied at 2.25% of the investment value, but it has now been abolished.
The popularity of direct mutual fund plans, introduced in 2012, surged in the past six years because of lower costs, with 41% of total assets under management (AUM) with Indian mutual funds having been invested directly as of March 2018.
Thus, mutual fund investments have been made friendlier and cost-efficient in the previous years, and the option to invest in direct mutual fund plans ensures you are saved from the costs of the commission that you’d otherwise shell out for an agent.
In fact, you can minimize your costs by choosing your mutual fund investment at Finserv MARKETS online, and save the trouble of branch visits or intermediaries. The portal provides financial planning guidance, insights into portfolio performance, and exclusive offers. An expedited mutual fund investment process where KYC completion means the investment in your desired products is done with few clicks and without losing money on commissions.
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