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The Impact Of Fees on  Mutual Fund Investment Returns

In every country, tax is the major source of revenue and similarly, every service company fee received for their service is the major source of revenue. Every business sector follows a different fee structure. In the Mutual Fund Industry, Asset Management Companies charge various fees for their service. Like, Expense Ratio, Entry loads, Exit loads, Management fees Account fees, Recurring fees etc. This blog will help you understand how fees impact the return on your Mutual Fund investments, I have provided some examples and highlighted points why it’s crucial to consider fees when choosing a Mutual Fund.

• Charges applied by Mutual Fund: 

Expense ratio is nothing but a combination of various fees levied by the Mutual Fund Company for a particular year. The expense ratio is calculated by using various fees. Management fees, different types of load, account fees, recurring fees etc. Generally, actively managed fund has a higher expense ratio than a passively managed fund.

Expense Ratio= (Total expenses/Avg. AUM )×100

1. Total expenses are nothing but costs for the company for a particular year.

2. Asset under management which refers to the total value of the fund.

Let's consider, 

Total expenses = 2,00,000 Rs

Total Asset under management = 1000000000 Rs

Total expense ratio = (200000/1000000000)×100=2%

Imagine you invest 1,00,000 Rs in a Mutual Fund, and the fund has an expense ratio of 2% per year.

1. Initial Investment: 1,00,000 Rs

2. Expense Ratio: 2%

Annual Expense Fee = Investment Amount × Expense Ratio 

                                    = 100000×2% =2000 Rs

 Let's assume, your fund is getting a 10% annual return for 10 years.

After calculating by compound interest formula our value of the fund will be 2,59,370 Rs.

Annual return after deduction of fees =10-2=8%

Therefore future value with fees =1,00,000 × (1 + 0.08)^10=2,15,890 Rs

The value of our fund after fees will be 2,15,890 Rs.

As we can see how the expense ratio reduces our fund value by 43480 Rs.

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• Loads In Mutual Fund:

Entry Load:

When you buy shares or units of a particular Mutual fund, MF levied some charges that are called Entry Load. Every Mutual Fund has a different entry load structure.in recent times, SEBI  has removed entry load from calculating the expense ratio.

Exit Load:

When you sell units of a particular Mutual fund, Companies levied some charges, which is called as exit load. Generally, the exit load is higher than the entry load because it discourages the person from taking out his investment.

• Management Fees:

Every company has a team for their day-to-day operation and maintenance. In Mutual Fund Company, the fund manager and research team play a crucial role. They find the best investment strategy for investors for that they take some charges as management fees.

• Account Fees: 

when you start investing in a Mutual Fund, you will require a separate profile. MF company maintain a separate account for each and every investor and for that, they levied some charges are called as account fees or maintenance fees. Every company has a different structure it could be annually or only once.

• Transaction charges:

When you purchase Mutual Fund units of more than 10,000 Rs., then Mutual Fund companies might apply transaction charges. Generally, it varies from company to company between 100 and 150 Rs i.e. 1 to 1.5 %.

• Conclusion:

Managing the Mutual Fund is not an easy task, it requires various skilled professionals. They charge different fees for their service. Most of the funds are transparent but they can have different hidden fees. Before selecting any mutual fund, it is important to understand the different fees associated with the fund. Management fees, transaction fees, maintenance fees, different loads etc. are the major fees. Every fund has a different module in its fees. All these fees directly affect your return on investment. To avoid extra stuff and get more clarity, consult with your financial advisor for clarity.

• FAQ:

1. How do fees affect a Mutual Fund?

Ans: All the fees are directly linked with the expense ratio. A higher expense ratio represents a high cost to the company which reduces the net asset value of the fund. Ultimately reduces the return on investment.

2. What is a good fee for a Mutual Fund?

Ans: The ideal expense ratio for Mutual Funds is between 0.50 to 1%. An expense ratio higher than 1.5 % is not good for investment, more than 1.5 % leads to a lower return.

3. How much Exit load is good?

Ans: Exit load and Entry load are the charges applied on selling and buying respectively. Generally, the Exit load is higher than the entry load. Exit load varies from 0.5% to 1% of the net selling units.

4. How can I find the expense ratio of a Mutual Fund?

Ans: Every fund provides accessibility to check the expense ratio of the fund. You can check expense ratio on the fund website.

5. How does SEBI regulate Mutual Fund fees?

Ans: SEBI has applied strong limits on expense ratio. It helps to protect investment. The value of the limits depends upon the net asset value of the fund.

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