Investment in mutual funds requires a deep understanding of various investment options available in the market. After screening different types of mutual funds, investors can choose top mutual funds to invest. To understand the technical know-how of investment in mutual funds, several pointers need to be considered such as what mutual funds are, how they work, how they can be effectively utilized to generate high returns as well as identifying the top mutual funds.
Mutual fund investment fees can substantially reduce an investor’s overall expected earnings from the mutual fund. Investing in a mutual fund, via Finserv MARKETS, can help you maximize your returns by cutting down on related fees. The platform charges 0% brokerage and commission fees, allowing for the returns generated to be much more significant.
Below are some types of fees related with mutual fund investment:
1. Fund Management Fees or Expense Ratio
Fund managers across asset management companies (AMCs) take investment decisions related to the type of assets on which funds should be invested and the portfolio allocation. This is an especially efficient process for top mutual funds. The fund management companies largely cover fund management and regular operational costs which could range from advisory fees, other commissions and ongoing service fees, legal and audit fees. All these expenses fall under the category of ‘Total Expense Ratio’ (TER), it is an annual charge levied on the investor, based on total assets available under management. The fees levied as total expense ratios can vary from scheme to scheme. Managed funds such as exchange traded funds (ETFs) and index funds comparatively have a lower expense ratio. This is due to passively managed funds tracking the underlying index which do not require a fund manager to take active investment decisions. Top mutual funds usually have dedicated fund managers who allocate funds and secure the investors’ interests.
Impact of TER on investors — A higher TER would translate to low returns, and a lower TER would give an investor a better return.
Market experts caution against relying solely on the expense ratio. They point to historical performance as a good metric to judge a fund. At the end of the day, a fund’s ability to consistently deliver above market returns is more significant than the expense ratio. A fund with higher performance that beats the market by 5% can afford to have a relatively higher expense ratio and still come out on top compared to other funds.
2. Upfront fee: Fees incurred when entering a scheme
Upfront fee is popularly known as an entry load fee. It is charged by mutual fund companies from investors when they join the company or enter a scheme. Moreover, upfront fee is collected to cover distribution costs, and for different types of mutual funds, companies charge different rates. In India, SEBI (Securities and Exchange Board of India) banned the entry charges which was 2.25% of the total value of the investment. Ban on upfront fee affected the mutual fund industry as a whole, but increased the returns generated by investors.
3. Exit load fees: Fees incurred while selling a mutual fund
Exit load is levied when the investor redeems or sells mutual fund units within a stipulated period. Exit load rate of charges differ from scheme to scheme, and on the other hand, companies charge on flat basis or on the basis of holding period. Exit loads are charged to retain investors from exiting the scheme. As per SEBI, maximum limit is set as 7% to charge an exit load, but companies usually prefer to charge around 1-2% to retain existing customers and attract new ones. However, for early exits from liquid mutual fund schemes, the SEBI recently introduced a graded exit load.
4. Other indirect costs
There are various types of indirect costs incurred by investors in mutual funds on recurring and one-time basis:
The charges related to brokerage, opening and maintaining a demat account falls under the category of recurring charges and investor has to pay these fees on a daily/monthly/quarterly/annual basis.
On the other hand, within the one-time category, security transaction charges are also levied while trading stocks, etc. Along with these, a nominal amount in the form of transaction fees is paid by investors, that is charged only once during the whole tenure of investment.
Choosing a good plan for investment considering the various types of fees included in the scheme is a tedious task, but Finserv MARKETS provides an easy platform to calculate the return by user-friendly SIP calculator with mere three fields to deal with i.e. monthly investment amount, tenor, and expected rate of return. Along with return calculation, company provides risk assessment by calculating the risk appetite and investment goal of an investor. Considering the options, an investor can access different types of mutual funds and begin their investing journey with Finserv MARKETS, and be guaranteed the highest returns.
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