Charges in Mutual Funds

There was much uproar of my yesterday’s post on Insurance Premium Charges and received comments to write a blog on Mutual Fund Charges.

Here are my excerpts:

Asset Management Companies charge certain fees on schemes held by investor. The AMC manages the fund portfolio, monitor market fluctuations and makes investment decisions.

To Manage funds Professionally costs are incurred such as Advisory Fees, Operational Costs, Investment Management Fees, Registrar & Transfer Agent Fees, Legal & Audit Fees, Agent Commissions & Ongoing Service Charge. All these charges are termed as Total Expense Ratio (TER).

  • Total Expense Ratio (TER)

SEBI has specified the limit as follows

Average AUM Equity Debt
1st 100 Crores 2.50% 2.25%
Next 300 Crores 2.25% 2%
Next 300 Crores 2% 1.75%
Balance 1.75%


  • Transaction Charges

There are no Transaction Charges for investment less than Rs. 10000. The charge is only levied to investment of more than Rs. 10000. New Investor- Rs. 150 deducted from his investment spread over equally for 4 months. Existing Investor- Rs.100 deducted from his investment spread over equally for 4 months.

  • Entry Load

There are No Entry Charges for Investment in Mutual Funds.

  • Exit Load

This fee is levied to discourage investors who opt out of the scheme. Different AMC’s charge different exit loads. Generally, exit load in Equity Scheme is 1% before completion of 365 days and 1% in Debt Scheme before completion of 3 yrs.

  • Taxation
  1. STCG: If any investor withdraws the invested amount before completion of 1 year, the profit generated on the invested amount is taxed by 15% known as Short Term Capital Gains.
    1. LTCG: If any investor withdraws the invested amount after completion of 1 year, the profit generated on the invested amount will be taxed by 10% known as Long Term Capital Gains. (This rule will start on 27th March 2018)

Till then, any investor can book profits & utilise the amount for further investments.


Complete Break – Up of Your Life Insurance Premium

The premium of a life insurance policy comprises of various charges put together. Some charges are common, a few vary on the basis of the type of policy, e.g:- Term, ULIP, Endowment etc…


Endowment Plans guarantee a maturity benefit after the policy tenure. To cater to this, a portion of the premium is invested in various avenues such as bonds, government securities, and GILT and money market instruments. This is not really a charge but a contribution that is made by the policy holder towards building a maturity corpus, deducted from the premium.

ULIP – Unit Linked Investment Plan

  • Mortality Charges

The most important part, mortality charges are what you would be paying the insurer, for the cover you get in return. Considered as the actual cost of your insurance, it is a vital part of the premium (around 15%). This mortality charge is calculated by insurance companies by using what is known as a “Life-Mortality table”, prescribed by the IRDA. The calculation is based on the average Indian life expectancy ratio. It also considers gender, age, profession, place of residence and overall profile of the insured for calculation. The younger and healthier you are, mortality charges work out lower.

Mortality charges are higher in riskier investment based insurance policies such as ULIPs in comparison to Plain Vanilla Term Plans.

  • Fund Management Charges

The fund management charges are typically applicable to an investment insurance policy such as a Unit Linked or Endowment Plan. For managing and investing your money in a particular fund, a fee is charged by the insurance company. The amount is anywhere between 1% to 2.5%, of the Assets Under Management (AUM). Fund management charge greatly depends on the type of fund chosen. The more aggressive the fund manager’s role in the portfolio, the higher the charge, in comparison to a low risk debt fund.  This charge is adjusted in the daily Net Asset Value of the fund.

  • Policy Administration Charges

For the insurance company’s expenses towards paperwork,  maintenance and administration, an amount known as policy administration charges (PAC) is levied. Chargeable on a monthly basis, this is a flat rate that varies from insurer to insurer, and policy to policy. On an average it is around 0.5% of the annual premium chargeable per month.

  • Premium Allocation Charge

Premium Allocation Charges are very typically associated with Unit Linked Plans. Though termed premium allocation, it actually has nothing to do with allocations. It is that charge that goes towards, any commission/ service charge for the insurance agent. It is deducted from your premium before the balance is invested in the fund of your choice.  Premium allocation charges are highest in the first policy year. It is deducted upfront from the premium paid on a yearly or monthly basis, depending on your policy.

  • Goods & Service Tax Charge

Mandated and declared by the government which is currently at 18% Goods & Service Tax (GST) is applicable on all charges such as fund management charge, premium allocation, mortality.

  • Other Charges

These below mentioned charges are levied along with your premium in case you opt for it.

  • Rider charges

If you seek a more comprehensive cover and opt for a rider such as a personal accident cover or critical illness benefit along with your life cover, you are charges an additional premium amount. The cost depends upon on the rider you choose.

  • Switch Charges

If you opt to switch over from one fund type to another in your ULIP policy, you may be charged for doing so. This charge is levied when the switch is actually made at; is a flat rate.


To Summarize

The Break – Up of insurance plan depends purely on the type of policy it is.

Pure Vanilla Term Plans have a premium comprising of mortality, administration and service tax only. As term plan does not have any maturity corpus, there is no requirement on the part of the insurance company to manage any portfolio. It is for this reason, term plans work as a cost effective insurance policy.

On the other hand, unit linked plans, top the scale when it comes to high premiums. Considering the investment component in the policy; it requires more management and administration, thus making it an expensive option.