Mutual Fund fees

After a long long wait SEBI ( Security & Exchange Board of India ) has announced that no Mutual Fund house can deduct any amount as any kind of expense from the Investment done by the investor, knowingly or unknowingly. Now the user will have to pay the expenses separately and that would be an additional amount from the amount he wishes to invest.

What was the scenario before?

Let’s say you want to invest Rs 10,000 in a Mutual Fund of your choice. As for many mutual funds it has a standard entry load of 2.25%. This would mean that an amount of Rs 225 would be deducted from your Rs 10,000 and Rs 9,775 only would be invested.

Normally investors are not aware of such small deduction being happening unless you invest in NFO where unit price is Rs 10 but you normally get the units priced at Rs 10.225.

How has the Scenario Changed?

For your investment of 10,000 all your amount would be invested in the mutual fund for buying the units and you may be needed to pay an extra amount to your broker which you can bargain as well depending on your relationship with your broker. If you directly invest without broker then you would not need to pay any extra amount but just need to go to the office for one time to submission of the form.

How its different from previous?

It looks like the new scenario is pretty much same as previous but actually its not. Here are some of the clear distinctions.

1. The expense is not deducted blindly and so you know how much you are paying as an expense. This was not the case before.
2. If you take the pain of investing it without any brokerage house you can save the fees. As an example if I wish to invest in any SBI Fund you can directly visit the SBI Mutual Fund office and submit the form.
3. Now there is nothing called entry load now but its more like expense and so in the world of competition it would be less for some brokerage houses compared to others.
4. The Entry load was never given completely to the brokerage houses. In the above example of 225 rupees some would go to the broker and some retained by the fund houses. Now its completely the factor of the broker and fund would need to issue units for complete amount they get giving some additional benefit to the investor.

How do you actually pay less?

Lots of theories but now lets get practical, I would show you how you can actually pay less. First thing is I would not take the burden of visiting 10 Mutual Fund offices to make investment in 10 best funds and so definitely I would be using some one as a broker. Normally I do all my Mutual Fund investment in ICICIDirect.com because of its one click purchase option for mutual funds and so I looked at its brokerage email and found the following.

If the cumulative MF holdings is more than Rs. 8 lakhs, you actually pay no fees.

If the cumulative MF holdings is less than Rs. 8 lakhs, Pay structure is

This means if you do a SIP of 1500 Rs per month in any particular mutual fund you used to pay 33.75 as fees and now it would be Rs 30/- For SIPs less than 1500 you would actually pay more brokerage.

Similarly if you invest for Rs 5000 as an investment amount ( which is minimum for major funds ) you used to pay 112.5 as fees but now you would pay Rs 100.

So normally its better for investment but for SIP of 1000 / 500 you would be paying more in ICICIDirect. Check out with your broker’s fees and see how much is the amount where you pay almost same or slightly lesser.