Understanding Mutual Fund Fees: What You Need to Know in 2024

Mutual funds offer a chance to put your savings into a mix of stocks, bonds, and other investments. But to make the most of your mutual fund investments, it’s important to understand the fees involved. These fees can affect how much money you make in the long run.

In 2024, the world of mutual funds continues to grow. More people are looking at mutual funds as a way to grow their wealth. This is especially true in India, where the stock market has been doing well. This blog will focus on explaining the different fees that one will confront in the journey of investing in mutual funds.

How to Find Information About Fees?

In India, mutual funds must disclose all their fees. You can find this information in the fund’s scheme information document or on the fund’s website. Many financial websites and apps also provide this information.

For example, if you’re using the HDFC SKY app to look at mutual funds, you should be able to find fee information for each fund. This can help you compare different funds and make an informed decision.

Types of Mutual Fund Fees

Let’s look at the different types of mutual fund fees and what they mean for you as an investor.

1. Expense Ratio

The expense ratio is one of the most important fees to understand. It’s the yearly fee that all funds charge for managing your money. This fee covers things like:

• Paying the fund manager
• Costs for buying and selling investments
• Marketing costs
• Administrative expenses

The expense ratio is shown as a percentage of the fund’s average assets. For example, if a fund has an expense ratio of 1% and you invest ₹10,000, you’ll pay ₹100 in fees each year.

In India, SEBI has set limits on how high expense ratios can be. These limits depend on the type of fund and how much money the fund manages. Generally, the more money a fund manages, the lower its expense ratio should be.

It’s worth noting that some funds, like index funds, often have lower expense ratios. This is because they don’t need as much active management. Apart from that, many investors are keeping an eye on upcoming IPOs (Initial Public Offerings) and using an online trading app to track their investments.

2. Fund Management Fee

This fee goes directly to the fund manager and their team. It’s usually the biggest part of the expense ratio. The fund management fee pays for the expertise of the people who decide which investments to buy and sell.

Some people think that funds with higher management fees will perform better. But this isn’t always true. It’s important to look at a fund’s past performance and compare it to similar funds.

3. Distribution Fee

This fee pays for the cost of selling the mutual fund to investors. It might include commissions for financial advisors or brokers who recommend the fund. In India, there are two main types of mutual fund plans:

• Regular Plans: These include a distribution fee.
• Direct Plans: These don’t include a distribution fee.

Direct plans usually have lower expense ratios because they don’t include this fee. If you’re comfortable making investment decisions on your own, a direct plan might save you money.

4. Administrative Fees

These fees cover the day-to-day costs of running the mutual fund. This includes things like:

• Keeping records of all transactions
• Sending account statements to investors
• Calculating the daily value of the fund

While these fees are necessary, they shouldn’t make up a large part of the total fees you pay.

5. Goods and Services Tax (GST)

In India, mutual fund fees are subject to GST. This tax is added to the other fees you pay. Currently, the GST rate on mutual fund services is 18%. 

6. Performance Fee

Some mutual funds charge a performance fee. This is an extra fee that the fund manager gets if the fund performs better than a certain benchmark. For example, a fund might charge an extra fee if it beats the NIFTY 50 index by a certain amount.

Performance fees can motivate fund managers to do well. But they can also lead to risky behaviour as managers try to beat their benchmarks. Not all funds charge performance fees, so it’s worth checking before you invest.

How do Fees Affect Your Returns?

It’s easy to think that a small difference in fees won’t matter much. But over time, even small fees can have a big impact on your investment returns.

Let’s look at an example:

Imagine you invest ₹1,00,000 in two different funds. Both funds grow by 10% each year before fees. But one fund has an expense ratio of 1%, while the other has an expense ratio of 2%.

After 20 years:

The fund with 1% fees would be worth about ₹6,11,070

The fund with 2% fees would be worth about ₹5,11,620

That’s a difference of nearly ₹1,00,000, just because of a 1% difference in fees!

This shows why it’s so important to pay attention to fees when choosing mutual funds.

Conclusion

When choosing a mutual fund, look at the total cost of owning the fund, not just its past performance. Compare similar funds to see if the fees seem reasonable. And remember, lower fees don’t always mean better performance, but they do mean you get to keep more of the returns your investment earns.

If you’re new to investing or find all this information overwhelming. If you’re looking for a reliable share market app, you might consider apps like HDFC SKY. It allows you to track your investments’ performance and get information about the live price movements of stocks in popular indices.