What a Mutual Fund Actually Costs You

The expense ratio covers running the scheme: the manager, the research, administration, and the distributor where one is involved. It is deducted from the scheme rather than billed to you, which is why nothing ever leaves your bank account.

That invisibility is the reason it gets underweighted. It applies every year, to your whole holding, whether the scheme did well or badly, and over long periods a small difference in the annual figure produces a large difference in outcome. Our page on the expense ratio covers it properly.

Two things follow. The NAV you see is already after this charge, so the performance you read is net of it. And comparing two similar schemes on cost is one of the few comparisons where the number is knowable in advance rather than a guess about the future.

A charge deducted if you redeem within a period stated by the scheme. Hold beyond that window and it does not apply at all.

The detail that catches people is that with a SIP each instalment has its own holding period, so redeeming from a scheme you have held for years can still attract a load on the most recent instalments. Our page on exit load works through that.

This is the one cost that is entirely within your control, because it only arises from a decision you make about timing.

Worth stating plainly, because people assume otherwise.

There is no entry charge on buying units. The full amount you invest, less a small statutory stamp duty on purchases, goes into the scheme. Nobody takes a cut off the top at the point of investment.

There is also no separate account maintenance fee for holding units in a folio, unlike a demat account. Our post on investing without a demat account covers that difference.

What a distributor receives comes out of the scheme expense ratio rather than being added to it, which is exactly the difference between a regular plan and a direct one, as our page on direct versus regular plans explains.

A scheme buys and sells securities, and that has costs: brokerage, statutory charges and the difference between buying and selling prices in the market.

These sit inside the portfolio rather than in the stated expense ratio, which means a scheme that trades heavily carries a cost you cannot read directly off any page. The portfolio turnover figure on the fact sheet is the closest indication, as our page on the fact sheet describes.

It applies unevenly. A passive scheme trades mainly when the index changes, while an actively managed scheme trading frequently incurs considerably more, and our page on tracking error covers how that shows up for a tracker.

The largest avoidable expense for many investors is not charged by anybody. It is the result of moving around.

Every switch is a redemption and a purchase, which can mean exit load and a tax event on money that never left the market, as our page on switching between schemes sets out. Somebody switching every eighteen months pays repeatedly to stay in roughly the same place.

Tax is not a charge by the fund, but it reduces what reaches you and it is triggered by your own decisions about when to sell. Our page on mutual fund taxation covers the structure, and your own position belongs with a tax adviser.

One arrangement charges at two levels, and it is worth knowing when you are in it.

A fund of funds holds units of other schemes rather than securities directly, so the outer scheme charges its own expense and the underlying scheme charges its own. Regulation caps the total, but you are paying twice for one exposure, which our page on fund of funds explains.

The version most households actually hold is a gold savings scheme, which owns a gold exchange traded fund that owns the metal. Our page on gold ETF versus gold fund works through whether the extra layer is buying you anything, and for a household without a demat account it usually is.

The test is the same wherever a second layer appears: what does the outer scheme do that you could not do by buying the underlying one yourself? Where the answer is nothing, the layer is a cost rather than a service.

In order of how much they matter over a long holding.

• The expense ratio, every year, on everything. This is most of the answer.
• Your own switching, which is usually the second largest and entirely self-inflicted.
• Exit load, which only matters if you redeem early.
• Everything else, which is small enough that worrying about it is a poor use of attention.

Cost is one of the few things you can know in advance, which our page on compounding explains matters because a recurring charge compounds against you. If you want to check what your existing holdings actually charge, that is a straightforward exercise and there is no charge for it. Get in touch.