Expenses that may Mar your Mutual Fund Returns

As a mutual fund investor, there are several reliable barometers for gauging the performance of your fund. However, when making important investment decisions, you should also be aware of various invisible costs which may mar your mutual fund returns.

NAV adjustment

If you withdraw money from your mutual fund before a specific period of life, you will be charged an exit fund. As an investor you will have a clear picture of the amount charged under the head of the exit load. However, when it comes to certain other expenses you may be kept in the dark. For instance, a certain amount can be charged by way of an adjustment to NAV or net asset value of your mutual fund. In such a scenario, the NAV of your fund is reduced to cover the expense incurred. In most cases, you may not be aware of the NAV adjustment which results in reduction in your fund returns.  

Annual expense ratio

As an investor, you have to pay an annual cost, known as expense ratio, charged by the fund for operating the scheme. Expense ratio covers various expenses incurred by the mutual fund such as advisory and management fees, transfer agent fees, operating expenses and custodian fees. You have to pay a higher expense ratio for  equity-oriented funds, followed by debt-oriented funds, exchange-traded funds and index funds. Again, this expense is adjusted, as it were, in the NAV of your fund, thereby making it another hidden cost. Consequently, your fund returns are reduced to the extent of the expense. The higher the expense ratio, the more it cuts into your fund earnings.

Dividend distribution tax

Equity-oriented funds do not have any dividend distribution tax while debt-oriented funds do. The dividend distribution tax is, therefore, payable prior to the distribution of dividend by funds which have 65% of assets invested in non-equity shares. You will receive the dividend on your mutual fund investment after a certain deduction by way of the dividend distribution tax (percentage of the dividend paid). The dividend distribution tax is applicable on the dividend which is distributable and  not on the actual payout. As a result, the cost is adjusted in the NAV, which reduces the final returns on your mutual fund. For instance, if your mutual fund has to pay a dividend of Rs.100 with a 25% dividend distribution tax, you will have a net payout of Rs.75.