Invisible expenses can pull down your mutual fund returns
While some expenses such as exit loads are known, there
are some such as expense ratio and dividend distribution tax may be hidden.
Mutual fund investors often do not pay attention to several
issues because these are not directly visible to them. This runs the risk of
ensuring that they get neglected when they should actually be considered
closely as they represent a cost or an expense for the individual that will
impact their overall decision making. A common example is with respect to
several expenses that are adjusted in the net asset value (NAV) of the fund and are thus invisible in terms of them being
seen separately. These need some attention so that one is able to consider the
details effectively while making investment decisions.
NAV adjustment
There are two ways in which a cost can be paid by the investor. One is a distinct manner of paying them and an example of this would be exit load that is charged to the investor in case they withdraw their money from a mutual fund before a specific time period. Here the amount is paid separately and hence when this is paid it is shown as an item by itself and due to this the investor is able to get an idea as to the actual amount that has been paid under this head. As against this there is another way in which the amount can be charged and this is in the form of an adjustment to the net asset value of the fund. What is done here is that the NAV is reduced by the extent of the expense. The impact for the investor is the same in both the cases which is that there is a reduction in the final return that comes to them. The manner in which this is done is though different and the NAV adjustment route often leaves the investor in a situation where they do not even know that such an event has occurred. This makes it all the more reason for them to know what has happened and the actual amount of the cost that they have paid.
Annual expense ratio
The annual cost that the fund charges to the investor for the purpose of running and maintaining the scheme often called the expense ratio is a significant figure in several funds especially equity oriented funds. The figure is lower for debt oriented funds and it dips even more for exchange traded funds and index funds. This is directly adjusted in the NAV and hence one does not know what is the figure charged but the impact that this has on the investment of the individual is that the returns are reduced by this extent. The higher the figure the worse it is for the investor as it eats away at the total returns that they are earning.
Dividend distribution tax
There is no dividend distribution tax when it comes to equity oriented funds but there is one present for debt oriented ones. What happens here is that the dividend that is paid out is after the charging of this tax so the amount that actually comes in the hands of the investors remains tax free. The investors think that they are not paying any cost for this receipt in debt oriented funds but this is actually not correct. The indirect impact of the dividend distribution tax is faced by them and this is adjusted in the NAV. The figure here is important because the amount here is significant in percentage terms of the dividend paid as it goes up to over 25 per cent of the dividend paid. Ultimately the investor pays the price for this so they need to know this figure and how this is impacting their final return.
NAV adjustment
There are two ways in which a cost can be paid by the investor. One is a distinct manner of paying them and an example of this would be exit load that is charged to the investor in case they withdraw their money from a mutual fund before a specific time period. Here the amount is paid separately and hence when this is paid it is shown as an item by itself and due to this the investor is able to get an idea as to the actual amount that has been paid under this head. As against this there is another way in which the amount can be charged and this is in the form of an adjustment to the net asset value of the fund. What is done here is that the NAV is reduced by the extent of the expense. The impact for the investor is the same in both the cases which is that there is a reduction in the final return that comes to them. The manner in which this is done is though different and the NAV adjustment route often leaves the investor in a situation where they do not even know that such an event has occurred. This makes it all the more reason for them to know what has happened and the actual amount of the cost that they have paid.
Annual expense ratio
The annual cost that the fund charges to the investor for the purpose of running and maintaining the scheme often called the expense ratio is a significant figure in several funds especially equity oriented funds. The figure is lower for debt oriented funds and it dips even more for exchange traded funds and index funds. This is directly adjusted in the NAV and hence one does not know what is the figure charged but the impact that this has on the investment of the individual is that the returns are reduced by this extent. The higher the figure the worse it is for the investor as it eats away at the total returns that they are earning.
Dividend distribution tax
There is no dividend distribution tax when it comes to equity oriented funds but there is one present for debt oriented ones. What happens here is that the dividend that is paid out is after the charging of this tax so the amount that actually comes in the hands of the investors remains tax free. The investors think that they are not paying any cost for this receipt in debt oriented funds but this is actually not correct. The indirect impact of the dividend distribution tax is faced by them and this is adjusted in the NAV. The figure here is important because the amount here is significant in percentage terms of the dividend paid as it goes up to over 25 per cent of the dividend paid. Ultimately the investor pays the price for this so they need to know this figure and how this is impacting their final return.
Happy investing
Source:Moneycontrol.com
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