

Mutual funds have emerged as one of the most popular investment options amongst the investor community with all categories -- retail, high net worth individuals and corporates – leveraging the fund route to make money through investing in various asset classes, including equity, debt and commodities as well.
More importantly, mutual funds are often looked upon as one of the safest ways of investing in the capital market as the fund management is taken care by expert fund managers and the volatility or the swings in the market can also be captured through the widely-popular systematic investment plans or SIP route.
While mutual funds also take care of the diversification aspect in one’s portfolio, there are costs involved while using the mutual fund route to invest in the capital markets.
Fund houses incur various expenses – marketing & advertising, fund management, administrative costs etc. -- while managing a fund and all these costs are ultimately borne by the investor through what is called an expense ratio.
Incidentally, the capital markets regulator Securities and Exchange Board of India (Sebi) has capped the total expense ratio or TER for all kinds of scheme categories and it ranges from 1 per cent to 2.25 per cent based on factors like the type of scheme and the quantum of assets it manages.
For instance, an equity-oriented scheme can charge a maximum TER of 2.25 per cent for the first Rs 500 crore of daily net assets, which drops to 2 per cent for the next Rs 250 crore and goes all the way down to 1.05 per cent.
Similarly, the TER ranges from 2 per cent to 0.80 per cent for schemes other than equity-oriented ones.
Then there are other scheme categories like index funds, exchange traded funds, fund of fund (FoF) and close ended & interval schemes where again the TER can range from a high of 2.25 per cent to a low of 1 per cent.
The TER, however, is not the only cost that an investor has to bear when investing in a mutual fund.
There are brokerage and transaction costs, which the fund house has to incur for executing trades in the market. This ranges from 0.12 per cent of trade value in case of cash market transactions and 0.05 per cent of trade value in case of derivatives transactions.
Then there are expenses not exceeding of 0.30 per cent of daily net assets, subject to new inflows from B-30 cities (beyond the top 30 cities, in industry parlance) and additional expenses not exceeding 0.05 per cent of daily net assets for the schemes having provision of exit load.
Further, Goods and Services Tax (GST) is also levied on the investment and advisory fees charged by the asset management companies (AMCs).
Apart from all these, the AMCs are also allowed to deduct transaction charges of ₹100 for existing investors in a mutual fund and ₹150 for first time investor for every subscription of ₹10,000 and above from the subscription amount of the investor.
The deducted amount is paid to the distributor.