What part of my investment will go to you (the agent/distributor)?
THE HIT If you don’t ask this question, you might end up paying the agent fee for his advice even if you didn't seek or get it. Every time you invest in a scheme, a transaction charge is deducted from your investment. The charge is Rs100 per transaction for an amount of Rs10,000 and above for existing investors, and Rs150 for first-time investors. This transaction charge goes to the agent. The advisory fee is over and above the transaction charge and is negotiable.
COURSE OF ACTION Be alert. Pay the agent depending on the extent of services availed. If you are not seeking advice, you don't need to pay him the advisory fee.
Will there be any other deductions on the investment amount?
THE HIT Even though there are no entry loads on MF schemes now, fund houses charge you a recurring fund management charge for every scheme. It could go up to 2.25 per cent of the investment amount, depending on fund type and its size. It is adjusted on a daily basis from the fund’s NAV, depending on the size of the fund’s corpus.
Higher expenses for a fund mean lower returns. Let's take an example. Suppose there are two funds with expense ratios (total percentage of the fund amount used for expenses by the fund house) of 1.75 per cent and 2.25 percent. If you invest Rs50,000 in each of them for 15 years, the difference between the final proceeds is around Rs21,000, a significant amount.
COURSE OF ACTION Look for schemes with consistent performance and low expense ratios.
Can I withdraw my money in full whenever I want, without any penalty?
THE HIT Some MF schemes, such as equity-linked savings schemes (ELSS), have a lock-in period. In other cases, if you withdraw your money before the expiry of the stipulated period, you could be charged with an exit load. Thus, much depends on the kind of scheme you've invested in.
Besides, as mutual funds are market-linked, the value of your investment will keep fluctuating with changes in market conditions and the sentiment prevailing at that point in time. As a result, it may be well below the principal amount when you need the money.
COURSE OF ACTION Get a fix on your goals and investment horizons, and choose schemes accordingly.
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