Hidden Costs in Mutual Funds....!!!

The costs involved in any investment determine the returns it can generate. In case of mutual funds, the daily NAVs are too volatile, but the costs are never adequately mentioned nor fully understood. These costs vary from fund to fund, just like NAVs and their impact on different categories of funds is different. Always understand that there are hidden charges in Mutual Funds. But it won’t be visible in the first sight.




Costs involved in mutual funds

The costs involved in mutual funds can be broadly classified into two categories:



· Entry/exit loads

· Expense ratio



Entry/Exit loads: These are one-time costs incurred when you enter or exit a fund. In other words we can tell that these are the costs involved while buying and selling Mutual Fund. These are charged as a percentage of your investment/encashment amount.



Expense ratio: It comprises some of the major expenses that a fund incurs:

Investment management and advisory fees

Transfer agent fee and expenses

Custodian fees

Various operating expenses

Why costs are Important

The answer is very clear- each rupee that a mutual fund charges as cost, reduces your returns by an equal amount. This never means that the mutual fund which has the lowest costs is always better. It just point out how important it is for an investor to clearly understand costs involved in a mutual fund.



On the face of it, a mere 1% difference in costs may not seem important, as long as the returns look attractive. However, even a seemingly minor 1 per cent difference in cost is significant in the long run. Consider an investment of Rs.10,000 in two funds giving the same returns. The net return after accounting for the costs shows a substantial difference. The following example will help you to understand this;
Source: http://www.indianmoney.com/article-display.php?cat_id=1&sub_id=11&aid=765&acat=&ahead=Hidden%20Costs%20in%20Mutual%20Funds....!!!