MUTUAL FUND COSTS :
There are two broad categories of mutual fund costs, namely – (a) Operating expenses (b) Sales charges.
These terms are explained below:
(a) Operating Expenses: Costs incurred in operating mutual funds include advisory fees paid to investment managers, custodial fees, audit fees, transfer agent fees, trustee fees, agents commission etc. The break-up of these expenses is required to be reported in the schemes offer document. When the operating expenses are divided by the average net asset, the expense ratio is arrived at. Based on the type of the scheme and the net assets, operating expenses are determined within the limits indicated by SEBI Mutual Fund Regulations, 1996. Expenditure which is in excess over the specified limits shall be borne by the Asset Management Company, the Trustees or the Sponsors. Operating expenses are calculated on an annualised basis but are accrued on a daily basis. Therefore, an investor face expenses prorated for the time he has invested in the fund.
(b) Sales Charges: These are otherwise called as sales loads and are charged directly to the investors. Mutual funds use the sales loads for payment of agents commission and expenses for distribution and marketing.
There is no entry load for all mutual fund schemes. The scheme application forms carry a suitable disclosure to the effect that the upfront commission to distributors will be paid by the investor directly to the distributor, based on his assessment of various factors including the service rendered by the distributor. Of the exit load or Contingent Deferred Sales charges (CDSC) charged to the investor, a maximum of 1% of the redemption proceeds is required to be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance shall be credited to the scheme immediately. CDSC is a structured back end load paid when the units are redeemed during the initial of ownership. The distributors should disclose all the commissions (in the form of trail commission or any other
mode) payable to them for the different competing schemes of various mutual funds from amongst which the scheme is being recommended to the investor. AMC(s) shal not charge entry/or exit load on bonus units and units allottd on reinvestment of dividend.