MUTUAL FUNDS COST?

PRESENTED BY:- ANKITA SAO(06)

BITOPAN NATH(15)REETESH AGARWAL(43)

SUMAN KUMARI(51)UTTAM AGRAWAL(55)

Problem with Cost of mutual fund

▪ Costs are the biggest problem with mutual funds. These costs eat into your return, and they are the main reason why the majority of funds end up with sub-par performance. 

▪ Some critics of the industry say that mutual fund companies get away with the fees they charge only because the average investor does not understand what he/she is paying for. 

Fees can be broken down into two categories: 1. Ongoing yearly fees to keep you invested in the fund. 2. Transaction fees paid when you buy or sell shares in a fund (loads). 

▪ The Expense Ratio 

The cost of hiring the fund manager(s) - Also known as the management fee, this cost is between 0.5% and 1% of assets on average.

• Administrative costs - These include necessities such as postage, record keeping, customer service, cappuccino machines, etc. Some funds are excellent at minimizing these costs while others (the ones with the cappuccino machines in the office) are not. 

• 12B-1 fee.

On the whole, expense ratios range from as low as 0.2% (usually for index funds) to as high as 2%. The average equity mutual fund charges around 1.3%-1.5%. You'll generally pay more for specialty or international funds, which require more expertise from managers.

Various fees and expencess

A. TRANSACTION FEES 1.Purchase Fee — 2.Redemption fees 3.exchange fees B.PERIODIC FEES 1.Management fees 2.accounts fees C.OTHER OPERATING EXPENCESS▪ 1. Transaction costs.

4. LOADS AND COMMISSIONS

▪ A mutual fund that comes with a sales charge or commission. The fund investor pays the load, which goes to compensate a sales intermediary (broker, financial planner, investment advisor, etc.) for his or her time and expertise in selecting an appropriate fund for the investor. The load is either paid up front at the time of purchase (front-end load), when the shares are sold (back-end load), or as long as the fund is held by the investor (level-load).

▪ A "load" is a fee imposed by a mutual fund family to buy or sell shares. There are two types of loads: front-end and back-end

▪ A load mutual fund charges you for the shares/units purchased plus an initial sales fee. This charge is typically anywhere from 4% to 8% of the amount you are investing or it can be a flat fee depending on the mutual fund provider. This is added to your purchase as a sales fee.

A no-load fund simply means that you can buy and redeem the mutual fund units/shares at any time without a commission or sales charge. However, some companies such as banks  and broker-dealers  may charge their own fees for the sale and redemption of third-party mutual funds. 

Most people recommend trying to avoid load funds altogether. Many studies have shown that both types of mutual funds offer the same return -

front-end load

▪ In a front-end load, you pay a fee to purchase a fund, but nothing to sell▪ A commission or sales charge applied at the time of the initial purchase for an

investment, usually mutual funds and insurance policies. It is deducted from the investment amount and, as a result, it lowers the size of the investment.

▪ Front-end loads are paid to investment intermediaries (financial planners, brokers, investment advisors) as sales commissions. As such, these sales charges are not part of a mutual fund's operating expenses. It is argued that a load is a cost that investors incur for obtaining an investment intermediary's expertise in selecting appropriate funds for clients. It is a matter of record that load funds do not outperform no-load funds.

Generally, the sales charge on a load mutual fund will be waived if such a fund is included as an investment option in a retirement plan such as a 401(k)

▪  

▪ Mr . Kothari invest in Rs 10000 ina mutual fund, which has a NAV of Rs 10 and entry load of 2% . What is the actual price per unit of fund by. Mr. kothari and how many units will he receive? How much amount will the fund receive??????????????????

▪ Soln-

Mr Kothari invest= Rs 10000

NAV of fund = 10.00

Entry load= 2 %

The actual pricepaid per unitof fund by Mr. kothari =10*(1+o.o2)=Rs 10.2per unit

No of units Mr. kothari will receive=10000/10.2= 980.39

He receives 980.39 units not 1000 units.

Therefore, amount of fund receive=980.39*10=9803.90

Balance (10000-9803.90)=196.10(paid to distributors)

BACK END LOAD▪ A fee (sales charge or load) that investors pay when selling mutual fund shares

within a specified number of years, usually five to 10 years. The fee amounts to a percentage of the value of the share being sold. The fee percentage is highest in the first year and decreases yearly until the specified holding period ends, at which time it drops to zero. 

Also known as a "contingent deferred sales charge or load.“

The back-end load is a type of sales charge that is used with mutual funds that have share classes, which in this case are identified as Class-B shares. Class-A shares charge a front-end load, which is taken from an investor's initial investment. Class-C shares are considered to be a type of level-load fund - no front-end and low back-end loads, but the fund's operating expenses are high. In all cases, the load is paid to a financial intermediary, and is not included in a fund's operating expenses. 

▪  

▪ Continuing our Earlier example mr kothari owns 980.39 units of mutual fund. The NAV of the fund is now rs 11,exir load applicable is 1% of redenption price.what is the amount receive by mr kothari and his distributor ????/

▪

Soln-

Mr kothari owns 980.39 units

NAV =11

Exit Load = 1% . Therefore, Amount received per unit sold = 11*(1-0.01)= Rs 10.89 per unit

The total amount received = 10.89*980.39 = 10676.45

Balance (10784.29- 10676.45)= 107.84(paid to the distributor)

Mr kothari Rs 10,784.29Distributor:Rs 107.84

Mr kothari Rs 10,784.29 Distributor:Nil

Mr kothari Rs 10,676.45Distributor: Rs 107.84

No load fund

▪ A no-load fund sells its shares without a commission or sales charge. Some in the mutual fund industry will tell you that the load is the fee that pays for the service of a broker choosing the correct fund for you. According to this argument, your returns will be higher because the professional advice put you into a better fund. There is little to no evidence that shows a correlation between load funds and superior performance. In fact, when you take the fees into account, the average load fund performs worse than a no-load fund.

Load vs no load▪ A no-load fund sells its shares without a commission or

sales charge. Some in the mutual fund industry will tell you that the load is the fee that pays for the service of a broker choosing the correct fund for you. According to this argument, your returns will be higher because the professional advice put you into a better fund. There is little to no evidence that shows a correlation between load funds and superior performance. In fact, when you take the fees into account, the average load fund performs worse than a no-load fund.

conclusion

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