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16 October, 2021 19:49 IST
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What are the fund's expenses ?

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 is unreasonable.

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.
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