Equity Linked Savings Scheme (ELSS) is a kind of mutual fund having a lock-in period of 3 years and qualifies for income tax exemption under section 80-C. As it is equity diversified fund and investment for a longer period of time can give the higher return than traditional investment option like PPF, NSC, Fixed Deposits. It should be noted that high returns attract high risk, ELSS fund involves higher risk as well. In this post, we will look at the various ELSS mutual fund Charges that you should consider while choosing an ELSS mutual fund.
All the charges applicable to equity mutual fund are applicable to ELSS fund except exit load. As ELSS fund have a lock-in period of 3 years no such exit load charges are applicable.
However, the ELSS charges attribute majorly to the business model and functioning of AMC. The expenses that they incur while running their business, salaries of professionally hired staff, all paperwork and so on. Let’s look at the various charges that an ELSS fund can charge.
There are basically three types of charges.
The entry load charges are levied by the company at the time of investing in the fund. Such fee does not go to Asset management company who issue mutual fund. It goes to the agents as distribution fee through which company gets investors for their mutual fund.
It should be noted that such entry load charges will not be applicable when investor purchase ELSS fund online. Such online purchase eliminates all the mediocre charges and hence the cost to purchase the same is less as compared to purchase through an agent. An investor has to pay entry load charges if he is opting to purchase ELSS through an agent.
Such entry load fee has to be reported into mutual fund statement. Say for example an investor is a first time investing into a mutual fund with an amount of Rs.10000 and say for example entry load is 1% so Asset management company has to clearly mentioned in his or her mutual fund statement that gross investment is Rs.10000 Less entry load of Rs.100 so net investment is Rs.9900
Recurring Charges / Expense Ratio
Recurring charges are professional charges levied by asset management company for the services of portfolio management. These charges are also called expense ratio. Asset management company hires highly qualified and experienced professionals to take good care of investor’s investment and AMC collects fees for such service.
There are different types of such charges like fund management fees, audit fees, trustee fees, custodian fee, selling and marketing fees, registrar fees etc. SEBI is a regulating body and prescribes the limit of the maximum amount that can be charged to investors as Expense ratio by asset management company.
The company while offering new fund has to do aggressive marketing and awareness campaign to influence the customer to invest into their fund. Such expenses cannot be more than 6%(even lesser in some cases) of net asset value as prescribed by SEBI.
As the name suggests, these are the charges levied by the company on early redemption of the mutual fund by investors. Such charges vary between 0 to 3% depending upon the scheme and time frame of redemption. Mostly the period is 1 year, 2 years etc.
If a large number of investors are withdrawing from the mutual fund, management has to make changes to the investment strategies of the entire portfolio. A mutual fund is meant for long term horizon. Hence to discourage the investors from withdrawing in an early stage of investment such exit load charged by companies. Moreover, early exit from the mutual funds can lead to a loss for the user as well.
It should be noted that lower the time frame of investment, higher the charges of exit load.
From above discussion, it is very clear that ELSS fund and all other mutual funds have long term horizon. The charges applicable are negligible but it does reduce the investment to a certain level and hence investor has to consider effective or absolute returns than gross return. Moreover, as the size of mutual fund assets increased, the expenses start decreasing and it will have a positive effect on NAV of the mutual fund.
Hope the article gave a good idea about ELSS mutual fund charges. Please feel free to drop any queries in the comments.