Glossary of Mutual Fund Terms

Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets.

All such costs for running and managing a mutual fund scheme are collectively referred to as ‘Total Expense Ratio’ (TER)

The TER is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses.

The regulatory limits of TER that can be incurred/charged to the fund by a Mutual Fund AMC have been specified under Regulation 52 of SEBI Mutual Fund Regulations.
Effective from April 1, 2020, the TER limit has been revised as follows.
 

*In case of Index Funds and ETFs: The total expense ratio of the scheme including the investment and advisory fees shall not exceed 1.00 percent of the daily net assets.
In case of Fund of Funds: 
(i) investing in liquid schemes, index fund schemes and exchange-traded funds, the total expense ratio of the scheme including a weighted average of the total expense ratio levied by the underlying scheme(s) shall not exceed 1.00 percent of the daily net assets of the scheme. 
 
(ii) investing a minimum of 65% of assets under management in equity-oriented schemes as per scheme information document, the total expense ratio of the scheme including a weighted average of the total expense ratio levied by the underlying scheme(s) shall not exceed 2.25 percent of the daily net assets of the scheme. 
 
(iii) investing in schemes other than as specified in (i) and (ii) above, the total expense ratio of the scheme including a weighted average of the total expense ratio levied by the underlying scheme(s) shall not exceed 2.00 percent of the daily net assets of the scheme: 
 
Provided that the total expense ratio to be charged over and above the weighted average of the total expense ratio of the underlying scheme shall not exceed two times the weighted average of the total expense ratio levied by the underlying scheme(s), subject to the overall ceilings as stated above in (i), (ii) and (iii). 

This, if a mutual fund scheme has assets worth INR 100cr and spends INR 2cr in managing the fund, we say the fund has an expense ratio of 2%.
For more details, refer to the link below: amfiindia.com/investor-corner/knowledge-center/Expense-Ratio.html

TER has a direct bearing on a scheme’s NAV. Lower the expense ratio of a scheme, higher will be its NAV. Thus, TER is an important parameter while selecting a mutual fund scheme.

Some Mutual Fund schemes charge an exit load on redemptions or cancellation within a stipulated time period.

Exit Load is like a penalty for premature redemptions because it is meant to discourage investors from selling their Mutual Fund investments too soon. Mutual Funds are not meant for short-term investments unless you are parking your surplus cash in a liquid fund. Since Mutual Funds are subject to market volatility, they are best suited for medium to long-term goals. Hence, most Mutual Fund schemes except liquid funds charge an exit load if investors sell their investment within the stipulated period.

Exit load is charged as a percentage and is applied on the redemption amount. If exit load is 1% then you’ll receive 99% of your redemption amount if you sell your investment before the stipulated period. Exit load as a percentage is applied on the NAV applicable to your redemption. If the NAV at the time of redemption is ` 100, you will receive only ` 99 for each unit of Mutual Fund investment you decide to redeem.

When a Mutual Fund scheme declares dividend, the NAV of the scheme falls to the extent the amount of dividend was declared on the next business day, when the units of the scheme are available for trading in the market. The day when the NAV of the scheme falls by the same amount as the amount of dividend declared or capital gain distributed to investors, is called the Ex-Dividend Date.

If the NAV of a Mutual Fund scheme is ` 200 before the dividend was declared and the scheme declares a dividend of ` 20 per unit, the NAV of the scheme will fall to ` 180 on the ex-dividend date i.e. the day on which the scheme will start trading in the market at a NAV of ` 180.