Taking note of falling sale of mutual fund (MF) units after the entry load ban in August 2009, the Securities and Exchange Board of India (Sebi) on Wednesday said it may introduce a new compensation system for MF distributors. So while entry loads may not be brought in again, you may still have to pay a fee when buying an MF.
However, even now, the fact that there is no entry load doesn’t mean you don’t pay anything to your fund. There are other fees that a fund houses charges from you.
In an MF, your fund manager basically invests in the markets on your behalf. For this, he needs to research and study the markets. There is a team to assist and another to do all the paperwork of the house, such as sending your account statement. It is for these services that the fund house charges a fee, known as expense ratio.
It is charged in the form of an annual fee. Expense ratio includes management fees, administrative fees and other operating costs and are deducted from the fund’s average net assets.
However, Sebi has capped these charges for various kinds of funds. In case of equity funds, the maximum expense ratio charged can be 2.50%, while for debt funds the cap is 2.25%. In case of index funds, fund houses can charge a maximum of 1.50%.
Most schemes, except fund of funds that invest in other funds and are thus more expensive, charge much less than the regulatory cap.
This charge is levied on closed-end funds that come with a specified time frame. If you withdraw before the specified period, you will be charged an exit load. The maximum exit load can be 7% of the total investment. But, typically, fund houses charge less than that. Generally, exit load on equity funds are higher than in debt funds.
You may be paying an advisory fee to your agent on your own. This fee is optional as of now but may become mandatory if Sebi goes ahead with its new compensation system. As of now, this is negotiable. In fact, many distributors do not charge anything. In fact, it is because of the absence of incentives that agents seem to have lost interest in selling funds.