There are certain kinds of charges associated to mutual funds. Have you ever tried to become aware of these Mutual fund charges? If not, don’t worry! Here, we shall be highlighting important ELSS and other Mutual fund charges that can simplify your long term investment journey.
Equity Linked Savings Scheme (ELSS) is a kind of mutual fund having a lock-in period of 3 years. This qualifies for income tax deduction under section 80C. Its an equity diversified fund and investment is for a longer period of time. So, it can give higher returns than traditional investment options like PPF, NSC and Fixed Deposits.
It should be noted that high returns attract high risk. Hence, ELSS or Equity Linked Saving Scheme fund involves higher risk as well.
In this post, we will look at the various ELSS mutual fund Charges that you should consider while choosing an ELSS mutual fund.
All the charges applicable to equity mutual funds are applicable to ELSS fund except exit load. As ELSS fund has a lock-in period of 3 years no such exit load charges are applicable.
However, the ELSS charges attribute majorly to the business model and functioning of AMC. The expenses that they incur while running their business, salaries of professionally hired staff, all paperwork and so on.
Let’s look at the common expenses that an ELSS or other mutual funds can charge.
Mutual Fund Charges:
There are basically three types of mutual fund charges in India. Let’s know about each of them in detail.
1. Entry Load:
The entry load charges were levied by the company at the time of investing in the fund. Such fee does not go to Asset management company who issues mutual fund. It goes to the agents as distribution fee through which the company gets investors for their mutual fund.
However, there’s some great news for investors. From August 2009 Entry load is not applicable. SEBI had done away with the practice of charging an entry load on mutual funds.
2. Recurring Charges / Expense Ratio:
Recurring charges are the professional charges levied by asset management company for the services of portfolio management. These charges are also called expense ratio. Asset management company hires highly qualified and experienced professionals to take good care of investor’s investment. AMC collects fees for such service.
There are different types of such charges like fund management fees, audit fees, trustee fees, custodian fee, selling and marketing fees, registrar fees etc. SEBI is a regulating body and prescribes the limit of the maximum amount that can be charged to investors as Expense ratio by the asset management company.
The company while offering a new fund has to do aggressive marketing and awareness campaigns. This is done to influence the customers to invest into their fund. But, these expenses cannot be more than 6% (even lesser in some cases) of net asset value as prescribed by SEBI.
3. Exit Load:
As the name suggests, these are the charges levied by the company on early redemption of the mutual fund by investors. These charges vary between 0 to 3% depending upon the scheme and time frame of redemption. Mostly the period is 1 year, 2 years etc.
If a large number of investors are withdrawing from the mutual fund, management has to make changes to the investment strategies of the entire portfolio. A mutual fund is meant for long term horizon. Hence, to discourage the investors from withdrawing at an early stage of investment, such exit load is charged by companies.
Moreover, early exit from the mutual funds can lead to a loss for the user as well. Remember, lower the time frame of investment, higher the charges of exit load.
Mutual Fund Charges: Summary
From the above discussion, it is very clear that ELSS and all other mutual funds in India have a long term horizon. The charges applicable may be negligible. But, it does reduce the investment to a certain level. Hence, an investor has to consider effective or absolute returns than gross return.
Moreover, as the size of mutual fund assets increase, the expenses start decreasing and it will have a positive effect on NAV of the mutual fund.
Hope this gave a good idea about ELSS mutual fund charges. Please feel free to drop your queries or any feedback in the comments section.