Mutual fund, as you may know, is a pool of investor money spread across different financial instruments like stocks, bonds, etc. Fund managers, who are appointed to oversee the flow and management of investments, minimise the risk by choosing the right medium to spread the money. Mutual funds can be of two types-equity funds and debt funds. Equity funds are high-risk, high-return proposition, while debt funds are considered to be less risky with stable income to the investors. Equity funds are invested in stocks, while debt funds are dispersed around bonds, debentures, etc. However, mutual fund investment comes with some charges that you need to be aware of. Broadly, there are two types of charges-one time charges and recurring charges, the details of which are illustrated below.
Entry Load-Entry load is levied during the time of unit purchase. The unit would be sold at a price higher than the net asset value (NAV). Currently, you do not have to pay any entry load as asset management companies (AMCs) have waived off the particular charge that was earlier applicable on mutual fund schemes.
Exit Load-The mutual fund will buy back the units at a rate below the NAV. You do not have to pay a fixed amount of exit loads as the charge varies depending upon the scheme you would have opted for. The charge, however, is in the range of 0.5%-3% based on the time for which you hold the investment. No exit load will be charged if you continue to hold the investment more than the stipulated period.
Transaction charges-Transaction charges are incurred upon your investment in a mutual fund scheme. The charge is paid to the intermediary or the distributor selling the fund. In case of Systematic Investment Plan (SIP), the transaction charge is applicable on investment more than Rs 10,000. The charge, which is restricted to purchase transactions only, would typically range from Rs 100-150. A distributor can avoid levying the transaction charge on all investors for a specific scheme.
Recurring charges-These charges, which refer to the fund management expenses, are deducted from the net assets of a particular mutual fund on a daily basis. After adjusting the expenses on a daily basis, the NAV gets declared.