Mutual fund: Understand the charges?

Mutual funds are an excellent route to create wealth for yourself. However, they do not come cheap. They have some charges. Some visible, some invisible. You need to be aware of the charges, that is all. Let us look at some of the charges:

1. Entry load: this is charged to pay the distributor for the sales effort that he/she puts in to make the sale. Normally this is nil for debt funds and about 2% for equity funds.

2. Brokerage paid for buying and selling of shares – this is a hidden charge because it gets adjusted in the NAV – the net asset value, and you only see the net sale/ purchase. However, as is evident, a fund with a higher churn – a lot of buy and sell transactions – pays a higher cost. It hurts and hurts bad.

3. Chargeable costs: the fund house is allowed to charge some expenses – like audit fees, trusteeship fees, custodian charges, mandatory communication expenses, marketing expenses, etc. The limit here is 2.5% p.a. This is charged on the market value of the assets and hurts – especially when the fund does well šŸ™‚

4. Trail commission: In order to encourage distributors from keeping the assets in one amc, amcs pay a trail fee – and this is part of the allowable expense – and thus comes out of the Nav. It is not clear what happens to the money that comes in as “direct” and on which there is no “entry load”. Think about this. God bless you.

5. Charges: The total costs of running an equity fund in India may be high or low by international rates. Do you know how much you are paying – well you are paying about 2.15% per annum. This includes all expenses – allowed by SEBI. If you think debt funds charge less, well you are mistaken. They charge about 1.25%. You will find Templeton India Income Builder charging about 2.15%. You like it? Well, lump it.

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