It's a trick company ads often do. A tempting offer is always accompanied
with the fine print tucked in a corner at the bottom of the ad. And
sometimes reading the applied conditions in the fine print might squeeze
all the attractiveness out of a great sounding offer. Buying a scheme
also requires that you give a careful look at the fine print.
Look for one thing in the fine print: the scheme's expenses. One such
expense is the bomb of a salary paid to the investment experts who manage
the fund. Apart from management fee there is also the money the fund
spends on advertising and marketing a scheme. There is a host of operating
expenses from buying stationery to maintaining the fund house's staff.
Should it matter to you if the fund house purchases a new computer?
It does. In whatever way the fund spends the money, the net expenses
are all billed in one way or the other to the unitholder. The expenses
of a scheme does not include brokerage commissions.
The part of mutual fund assets that gets removed each year for expenses
expressed as a percentage is the expense ratio. It provides a quick
check of efficiently the fund manager is handling the fund.
The costs of the fund management process that includes marketing and
initial costs are charged when you enter the scheme. These charges are
termed the entry load, the additional charge you pay when you join a
scheme and something everyone will tell you to watch out for. And if
there is nothing to watch out for, i.e., the bold font in the new scheme's
ad says `No entry load'. Will you jump for it? Come on, investment was
all about smartness. No fund can do away with these charges unless,
of course, a reformed Harshad Mehta decided he would help Indians make
money without charging a rupee. What funds that come with such offers
usually do is to include these charges not in the entry load but somewhere
else. It could also be deducted from the returns that you get.
Just like entry load some funds impose a fee when you leave the scheme,
i.e., redeem your units, called the exit load. Loads are usually not
flat amounts but have a structure. For example, for most schemes the
entry load depends on the number of units of the scheme you buy. Similarly,
exit load in most cases is based on the number of units you sell and
also on the duration for which you held those units. As per SEBI regulations,
the maximum exit load applicable is 7%. There is a further stipulation
by SEBI that the entry load and exit load put together cannot exceed
7% of the sale price.
Contingent Deferred Sales Load (CDSL) is a charge imposed when the
units of a fund are redeemed during the first few years of ownership.
Under the SEBI Regulations, a fund can charge CDSL to unitholders exiting
from the scheme within the first four years of entry.
Funds can change the load structure periodically. If you are a unitholder
of a scheme that charges an exit load, and the scheme changes its exit
load structure, then you will get a prior notice of the change. The
new structure will be applicable to you rather than the load structure
you were informed about when you joined the scheme.
Now don't get too hassled about loads. Best thing to do when a scheme
imposes a new load, is not to invest more money if the load charged
Needless to say, loads if any are only applicable to open schemes.
And not close-ended schemes because you can only buy such units from
the fund only when the scheme is launched.
So what's the smart tip? Any day, lower the expenses the better it
is. Smart and well-managed funds keep their expenses low. Smarter funds
know exactly how to make their offerings attractive by smartly tucking
away expenses either in entry load or exit load or by cutting on returns.
And smart investors always get to beat the funds by figuring out where
all the expenses are included. Right?
Looking at the past performance you cannot for sure predict what returns
the fund will give in the future. However, by examining past performance
you can get an almost certain idea of what the expenses for a scheme
could be in the future. That's because the expenses don't depend on
a scheme performance. It's dependent on the deftness of the fund manager.
Badly managed funds that have schemes with consistently higher expenses
compared to funds of the same category with lower expenses, find it
tough to curb their expenses.
Schemes with smaller assets to manage and particularly those that are
not part of a large fund house will generally have higher expenses relative
to schemes with larger assets. Fresh schemes generally take some time
to overcome their expense burden.