Meaning of Net Asset Value (NAV) – Expenses Ratio – Load/No-Load Funds in mutual funds

Mutual funds are popular among large sections of retail investors because they offer investors the opportunity to diversify and therefore spread out their risk over several investments. Mutual funds are managed by full-time, professional fund managers who have the expertise, experience, and resources to actively buy, sell, and manage investments. But when we visit any Asset Management Company (AMC) website we come across various terms and jargon that are difficult to understand. Some of them are Net Asset Value (NAV) – Expenses Ratio – Load/No-Load Funds. So, let us go through the below-mentioned terms to get a clearer insight and understanding of them.

NAV: NAV stands for Net Asset Value. The performance of a mutual fund scheme is denoted by its NAV per unit.

Net Asset Value is calculated as the Net Asset of the Scheme / Outstanding Units.

For example: NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on a given date. For example, if the market value of securities of a mutual fund scheme is ₹1500 lakh and the mutual fund has issued 100 lakh units of ₹ 10 each to the investors, then the NAV per unit of the fund is ₹ 15 (i.e., ₹1500 lakh/100 lakh).

Since the market value of securities changes every day, the NAV of a scheme also varies on a day-to-day basis.

NAVs of mutual fund schemes are published on respective mutual funds’ websites as well as AMFI’s website daily.

Expenses Ratio: The expense ratio is the annual maintenance charge levied by mutual funds to finance their expenses like operating and administrative charges for operating the mutual fund. The expense ratio measures the percentage based on the fund’s assets under management (AUM). Expense ratios are usually deducted from total revenue generated by a mutual fund, before disbursing it to the investors. Higher expense ratios imply a higher proportion of the returns being removed, thereby providing lower returns on investments.

The Total expenses of the funds are divided by the total assets of the funds to arrive at the Total Expense Ratio (TER). The higher the asset base, the lower the ratio, and vice-versa, given total costs remain constant. Thus, TER (Total expense ratio) has a direct bearing on a scheme’s NAV – the lower the expense ratio of a scheme, the higher the NAV. Thus, TER is an important parameter while selecting a mutual fund scheme.

As per SEBI regulations, the entry load is abolished from the calculations of the total expense ratio of a mutual fund.

Expense Ratio Limit by SEBI

Expense ratios charged by an asset management company on their mutual funds are subject to certain restrictions imposed by the Securities and Exchange Board of India (SEBI), to protect the interests of investors. This ensures a substantial flow of financial resources to the capital market of the country. For an initial asset base of Rs. 500 Crore of equity fund, a maximum total expense ratio of 2.25% and debt funds of 2% is levied. For the next Rs. 250 Crore, if any, a ratio of 2.00% for equity and 1.75% for debt funds is imposed. On the next Rs. 1,250 crores 1.75% and 1.50%, on the next Rs. 3,000 crores-1.60% and 1.35%, On the next Rs. 5,000 crores 1.50% and 1.25% levied.  On the next Rs. 40,000 crores 0.05% reduced for every increase of 5000 crores or part of for equity and debt funds.  For above 50000 crores expense ratios are 1.05% and 0.80% levied respectively for equity and debt funds.

In addition, mutual funds have been allowed to charge up to 30 bps more, if the new inflows from retail investors from beyond the top 30 cities (B30) cities are at least (a) 30% of gross new inflows in the scheme or (b) 15% of the average assets under management (year to date) of the scheme, whichever is higher. This is essential to encourage inflows into mutual funds from tier-2 and tier-3 cities.

As per the current SEBI Regulations, mutual funds are required to disclose the TER of all schemes daily on their websites as well as AMFI’s website.

Entry Load: It is the amount that has to be paid by an investor while joining a mutual fund. This fee covers the distribution costs borne by the asset management company for promoting an MF scheme. This reduces the total disposable income over which a person earns interest. Different mutual funds charge different percentages on entry, at the discretion of the concerned asset management company. However, as per the guidelines of the Securities and Exchange Board of India, no entry load can be levied on applications received directly by asset management companies through the Internet or designated collection centres. The entry load should be waived if distributors, agents, or brokers are not involved.

Exit load: Exit load is charged at the time of redeeming (or transferring an investment between schemes). Exit load in mutual funds with no lock-in period refers to the fee that the Asset Management Companies (AMCs) charge investors at the time of exiting or redeeming their fund units. It is also referred to as the commission to fund houses or exit penalty if an investor exits the fund in the lock-in period. Exit load usually ranges from 0.25% to 3% and varies across AMCs.

No Load: There are different costs when you buy (entry load], or sell (exit load), your mutual funds units. A no-load fund is a special kind of fund where you do not have to pay extra fees when you buy or sell shares. However, some no-load funds impose redemption fees if the units are sold within a specific time of acquisition. Also, no-load funds may offer a more restricted selection of investment options compared to load funds which could be a drawback for investors seeking specific investment strategies. Meaning of Expense ratio, entry load, exit load, and NAV in mutual funds.

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