Nothing in life comes for free. Whenever you invest in Mutual Funds, you incur 3 different kinds of costs.
In this episode of MoneyKiBaat, Anmol answers following questions about charges in mutual funds:
What is the expense ratio in Mutual Funds?
What is the exit load in Mutual Funds?
Are there any transaction charges in Mutual Funds?
How do charges differ in direct and regular plans of mutual funds?
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Disclaimer: This podcast is for educational purposes only. Anything said should not be construed as advice.
There's no free lunch - which means, in life you don't get anything for free.
So whenever you invest in mutual funds, you don't get them for free. While investing in mutual funds, you pay three types of charges.
The first and the most important charge is "Expense Ratio". So when you invest in mutual funds, you can think of it as paying a service charge to that company. Service charge is required to cover up their sales and marketing costs, to cover up their administrative costs and for paying commission to your distributor or an agent. A single commission is levied by a mutual fund scheme which includes all these costs, and is known as "Expense Ratio".
It differs from scheme to scheme. Usually for the equity schemes that invest in stocks, the expense ratio may vary from 1% to 2.5%. And for the debt schemes that invest in bonds, the expense ratio may vary from 0.3% to 1%.
For example, if the expense ratio of a scheme is 2% and you have invested Rs.10,000 in that scheme in a year, then Rs.200 will be deducted as an expense ratio. And don't think that you don't have to pay the expense ratio if you withdraw your money before the end of the year. This expense ratio is charged on a daily basis. If the expense ratio is 2%, then 2% divided by 365 will be charged everyday. So, as long as you are invested, you are paying the expense ratio everyday.
And one more important thing, the expense ratios of a direct and a regular plan of the same scheme can also be different.
Direct plan doesn't charge any commission because no agent is involved, due to which the expense ratio of a direct plan is always less than a regular plan.
For example, I randomly checked Motilal Oswal Focused 25 fund's expense ratio. Regular Plan's expense ratio is 2.31% and that of the Direct Plan is 0.91%. So if anybody invests in a scheme's direct plan, then he or she can easily save around 1.4% commission. And the difference of 1% between direct and regular plans in equity schemes is very common.
Now, we'll talk about the other charge which is called "Exit Load".
When you withdraw your Fixed Deposit before its maturity, you need to pay a penalty right? Likewise, if you withdraw the money that you had invested in specific mutual fund schemes before a particular period of time, then you need to pay a penalty which is called "Exit Load" - the load required to be paid to exit from the mutual fund. Most of the equity schemes charge 1% exit load, if you withdraw your money before the completion of the first year.
Hence, if you withdraw Rs.10,000 while redeeming the mutual fund scheme, then you have to pay an exit load charge of Rs.100. And if you redeem your money after 1 year, then you don't have to pay any exit load.
Most of the debt schemes have no exit load or they are applicable only for few months. So whenever you're buying a mutual fund, you have to be aware of the exit load so that you know that you don't have to take your money out during that period.
Third and the last and a very rare charge is the "Transaction charges".
When you invest in mutual funds for the first time, few agents and distributors can also charge you a transaction cost. If you invest more than Rs.10,000, then your distributor may charge you between Rs.100 and Rs.150 as a transaction charge. Also direct plans have no transaction charges.
So guys, I'm sure you must have understood the three types of mutual fund charges.
Feel free to post any questions in the comment section.
This was your host Anmol Gupta for the show, Money Ki Baat.
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