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NAV is calculated after expense ratio

FUND QUERIES

BS Reporter  |  Mumbai 

The expense ratio is the total amount of annual expenses incurred by the fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing and distribution fee.

These expenses are divided by the assets under management. Simply put, the expense ratio is theper unit cost incurred in managing the fund. The net asset value (NAV) which you see daily is calculated after deducting these expenses. However, the expense ratio of a fund is disclosed only once every six months.

The expense ratios of equity and debt funds differ. Since the expenses of equity funds are more than those of debt funds, the expense ratio on equity funds is greater. As per the regulations of the Securities and Exchange Board of India (SEBI), a mutual fund can charge a maximum expense of 2.5 per cent (equity funds), 2.25 per cent (debt funds), 1.5 per cent (index funds) and 0.75 per cent (Fund of Funds).

Costs do matter! So, while choosing a fund, everything else being equal, choose one fund with lower expenses because that will result in a higher return.

What are the tax implications for SIP investment? If I start the SIP on January 1, 2007, and continue it for a year, can I sell all the units at the end of the year (January 2008)?

- Shailesh Bhagwant Shirke

You can sell the units when you want. But you will be taxed if you do not hold them for at least a year. The Systematic Investment Plan (SIP) is nothing but a regular investment at defined periodicity. Hence, each instalment of your SIP investment in an equity fund will be liable for short-term capital gains tax if not held for a minimum period of 12 months.

So the units bought in February will be exempt from tax only if you sell it 12 months after February. And so on and so forth. You have to hold the units one year from the date you bought them, not from the date you started the SIP.

Please clarify the amount one gets on redemption of open ended equity funds. Is it NAV less exit load, less expense ratio? The entry load is charged to cover the commission given to brokers. Why is an exit load charged?

- Ashwin Bhagat

The expense ratio is the total amount of all annual expenses incurred by the fund. In the case of open-ended funds, all these fund expenses are deducted from the NAV on a daily basis. So what is the net asset value (NAV)? It is the market value of the asset per unit after subtracting the liabilities.

It is the most widely accepted tool for measuring the performance of any scheme of a mutual fund. In the NAV calculation, the expense ratio is deducted on a daily basis. So at the time of redemption, the amount you get it will be present NAV from which the exit load, if any, will be subtracted. Now let's talk about the loads.

The entry load is levied when you buy the fund. This is primarily paid to the advisor or distributor. The exit load is charged only if you redeem your units before a defined period.

The purpose is to deter investors from investing for short periods of time and encourage them towards long term investments. But it is also used to cover advertising expenses and other costs incurred for managing the fund.

Generally, exit loads vary according to investment period. The step-wise exit load is called contingent deferred sales charge (CDSC) and it is continuously decreases over a period of time.

If you stay invested for a considerable period of time, you pay no exit load when you sell your units.

consists of a number of stocks of companies. When any one of the companies declare dividends or the stock goes for a split, does that get factored in the NAV of that fund? If so, how would I as an investor in a fund know that?

- Sudhakar


All corporate actions get reflected in that day's net asset value (NAV). So, dividend from a company whose stock is in the portfolio gets factored in the NAV. The change in daily price, periodic dividend, bonus, rights, splits or the impact of a merger or a demerger is reflected in the NAV the very day it gets into effect or is actualised.

Fund companies do not report on the events that occur in their portfolio stocks. In our opinion as well, a mutual fund investor should not try to find out. That is the whole idea of a mutual fund

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First Published: Sun, June 22 2008. 00:00 IST
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