How exactly do Mutual Funds charge their fees?

A Goalwise investor asked me this question about a Mutual Fund’s fees just yesterday via email:

Hi Swapnil,

Thanks for connecting.

Another question I have on investment through Goalwise: I understand that each fund charges a certain fee (managing fee, brokerage etc) of the total amount invested. During readjustment of portfolio, when you shift my money from one fund to another, will the charges be applied again by the new mutual fund? Also, is this charge one time or is it an annual fee that is applied on the amount?

Please let me know.

This is a question that a lot of people probably have on their minds about Mutual Funds in general. Keeping track of the fees being charged for various investment products can be difficult. But thankfully, due to strict SEBI regulations, Mutual Fund fees are quite transparent. So I thought of taking this opportunity to answer the question for all our readers.

Mutual Funds deduct these charges on a daily basis. How? Basically, the total fund value changes everyday as per the MF portfolio’s performance on that day. At the end of each trading day, the fund deducts its daily expenses from the total fund value to arrive at a net fund value, which is then divided by the total number of units issued by the Mutual Fund.

This calculation yields the daily Net Asset Value, or NAV, which is the asset value of one unit of the fund, net of all expenses. Mutual fund companies declare NAVs every day after closing of the market. They check the value of their underlying assets (stocks, deposits etc.), deduct expenses, and then declare the NAV.

At the end of this process, the returns you see (your purchase NAV vs. the current NAV) reflect your returns after all expenses i.e. the returns you actually pocket.

To give you a rough idea, if a fund has an annual expense ratio of 1.825%, its daily expense ratio will be 1.825/365= 0.005%. So 0.005% will be deducted from the total fund value at the end of the day to arrive at the net fund value. The actual expense ratio calculation is slightly more complex. This is because the fund value is changing on a daily basis. Additionally, the Mutual Fund’s expenses may also change time to time based on management decisions.

Finally, the NAV will be calculated by dividing the net fund value by the total number of units of the fund.

You can then multiply this NAV with the number of units you hold to get the current valuation of your investment, which is your share in the net fund value (proportionate to the number of units you hold).

Since this calculation is done on a daily basis, switching won't affect the charges you pay somebody to manage your investments.

However, at the time of switching funds, there are two things we do need to take care of, Exit Load and Taxation.

Having said that, Goalwise generally doesn't perform switching before 1 year, by which time the investment becomes free of exit load, and even tax free in the case of equity mutual funds. However, if the need arises we may do switching before/after this period. The full rationale of such actions will be provided to you beforehand, and they will only be executed with your explicit permission.

I hope that sheds light on the matter. I request all our users to keep sending in these questions. We love answering them :)


Goalkeeper & CEO @ Goalwise