Monday, July 3, 2017

Mutual fund expenses - how are these calculated and charged?

How are mutual fund expenses charged? Do I pay both at the time of entry and exit? In such a case, does it not become costly? There are many questions around the fund expenses. Read on for the answers

The English translation is as under:

Understanding mutual fund expenses
We have already covered the expenses charged for the management of a mutual fund scheme in one of our earlier articles. Mutual fund companies are allowed to levy only two types of charges, viz., (1) exit load – chargeable at the time of investor’s exit from the scheme in certain schemes only if the exit is within a stipulated period of time, and (2) fund expenses – chargeable to meet expenses and payment of fees to various constituents.
We will elaborate on the second in this article today.
There are various constituents working to make the mutual fund run professionally in the best interests of the fund’s investors. These constituents need to be paid their fees for the services provided. This fee is payable through charging each scheme a certain percentage of the fund’s corpus.
These expenses are mentioned in terms of percentage of the scheme’s AUM (Assets Under Management) or the scheme’s corpus. SEBI regulates the maximum expenses that can be charged to the scheme.
These expenses are mentioned as annualized percentages with respect to the scheme’s AUM, but charged on a daily basis such that the scheme’s NAV accounts for the expenses on a daily basis. Let us understand the nature of these expenses with a calculation.
Let us say, a scheme’s corpus is Rs. 1,00,000 and the expenses are 2% p.a. In such a case, the expense charged for the day would be as under:
Expense charged for the day = Scheme’s corpus X fund expenses (% p.a.) / 365
In the example given,
Expense charged for the day = Rs. 1,00,000 X 2 % p.a. / 365
                = Rs. 5.48
If the scheme corpus goes up the next day, a higher amount would be charged for that day. At the same time, if the scheme corpus drops, the expenses charged would be lower. Taking the calculation further, if the scheme’s corpus goes up to, say Rs. 1,10,000 the next day (corpus can change on account of change in the market prices of the securities as well as fresh inflow by investors or redemptions or payment of dividends).
Expense charged for the day = Rs. 1,10,000 X 2 % p.a. / 365
                = Rs. 6.03
On the other hand, if the corpus had falled to Rs. 95,000; the expenses charged would reduce.
Expense charged for the day = Rs. 1,10,000 X 2 % p.a. / 365
                = Rs. 5.21

If someone stayed invested only for three days and then took the money out, the expenses charged would be only for the three days that one stayed invested. Also please note that this is not charged at the time of entry or exit, but on a daily basis. Thus, the expense is charged fairly to all fund investors in proportion to the amount invested as well as their stay with the fund.
Hope this clarifies some doubts that one might have.

No comments:

Post a Comment