The fees charged by mutual funds can considerably impact total return and should be carefully analyzed by investors. All funds charge investors some degree of management fees for running the fund.
Fees and Charges associated with Mutual Funds
These represent one-time fees that an investor pays for investment/disinvestment in an open end fund. Details of these fees and charges are disclosed in the offering documents of mutual funds. These include:
Front-end Load: This load is charged to the investor upon purchase of units of the fund.
Back-end Load: This load is charged whenever an investor redeems his investment in the mutual fund, however, not all open end funds charge back-end load.
Contingent or Deferred Sales Load: Some open end funds charge contingent or deferred sales load on redemption of investment, however, mutual funds progressively reduce the load if an investor holds his investment for a longer period of time. This load is only charged in case when there is no front- end load.
Management fee: This is a fee charged by the AMC for the management of the fund. The AMC is entitled to be paid in arrears on monthly basis out of the fund property monthly in arrears of the accrued remuneration of an amount not exceeding three percent (3.00%) of the average annual Net Assets of the Fund during the first five years and an amount not exceeding two percent (2.00%) of the average annual Net Assets of the Fund thereafter calculated on a daily basis during the year.
Trustee fee: This is the fee charged by the trustee for the provision of trusteeship and other services for the fund's assets. The Trustee is entitled to a monthly remuneration out of the fund property based on an annual tariff of charges as per tariff structure disclosed in offering document. The annual tariff is applied to the average of the annual Net Assets of the Fund as calculated on a daily basis during the year.
Other fees: All expenses incurred in connection with formation and registration of open-end mutual funds including but not limited to execution and registration of constitutive documents; fee payable to SECP, auditors' fee, fee payable to rating agencies, legal costs, printing cost,; brokerage and transaction cost, bank charges, borrowing and financing cost, hedging cost, taxes, duties and other cost levied by foreign jurisdictional foreign investments , cost of registration of assets in the name of trustee and listing fee payable to stock exchange.
Net Asset Value (NAV)
The NAV is the market value of the assets of the scheme minus its expenses and liabilities. The per unit NAV is the net asset value of the funds divided by the number of units/ certificates outstanding on the Valuation Date. The performance of the Mutual Fund is denoted by its NAV.
NAV = Current Market Value of all the Assets – Expenses – Liabilities
Total Number of Units Outstanding
For example, if the market value of securities of a Mutual Fund scheme is 500 lac and the Mutual Fund has issued 10 lac units of 10 each to investors, then the NAV per unit of the fund is 50.
Expense ratio is the mutual fund’s annual fund operating expenses, expressed as a percentage of the fund’s average net assets. The expense ratio of a stock or equity fund is the total percentage of fund assets used for administrative, management, advertising and all other expenses. An expense ratio of 1% per annum means that each year 1% of the fund's total assets will be used to cover expenses. The expense ratio does not include sales loads or brokerage commissions.
Expense ratios are important to consider when choosing a fund, as they can significantly affect returns.
Units of open-end mutual funds can be partially or fully redeemed at any time as the investor may decide. However, it is imperative to read the offering document or ask the sales agent about any relevant information pertaining to redemption of units of the mutual fund.
Fund Manager Report
This is a monthly report produced by an asset management company wherein information on composition and performance of mutual funds is presented. Fund Manager Report appears on the website of the asset management company.
Rights & Obligations of Unit Holder
As a unit holder in a mutual fund, one is entitled to receive periodical statements of accounts from the AMC after every 30 days; inspect the documents of the mutual funds specified in the offering document; and receive constitutive documents.
However, it is pertinent to mention that the investors are not entitled to voting rights when holding units in a mutual fund.