So far in the series, we’ve discussed why you should invest, why mutual funds are ideal for long-term investing, and the various types of mutual funds. If you are investing in a mutual fund, you need to pay the asset management company (AMC) to manage your money, but you don’t pay anything every month from your pocket. You must be wondering if mutual funds are free. They aren’t. Every mutual fund scheme has a fee, and this is called the total expense ratio (TER). This is the fee charged for managing your investment.
Also, not all mutual fund schemes have the same expense ratios. Every mutual fund scheme comes in two variants: direct plans and regular plans. In this video, @Karthik explains what an expense ratio is, how it is charged, and the difference between regular and direct plans.
@Karthik
Sir, I been running from pillar to post, so to speak, to get one of my query on ETF/Mutual Fund.
I am an investor in SBI ETF Nifty 50. I want to know as a unit holders, what comes to the unit holder and what goes to AMC.
1, I am fully aware that dividends of corporates which the ETF has invested accrues to the unit holders.
2. At the same time, I am aware that ETF charges are taken from the cash balance on a daily basis.
What else apart from the above accrues to the unit holder. The reason why I ask is when I check SBI Nifty 50 ETF profit and loss account which they send to the unit holders, this sheet has so many items including 1 and 2 above. The net profit which is shown in the Profit and Loss statment, does it accrues to the unit holder or does this goes to AMC.
Some of the experts which I have asked, tell me “They Think”, no one is sure as to who gets what. Since you are the expert in this field, can you please solve this query.
The image you posted is for SBI Nifty Index fund and not ETF,
and what is shows is that on the total amount it has collected form investors, how much dividend and onther income it got and then how much are expenses, the resultant is automatically distributed to the investors. Any AMC on its own only takes management fee, and distribution fee for regular plan.
But why this, till and index fund or etf is giving same returns as nifty and not have high tracking error, what troubles you, whatever they do. Index funds are for peace of mind, if you will take tension following index funds, you are defeating its purpose…
Ideally only the amount mentioned as expense ratio can be taken by the AMC. The rest amount has to be reinvested back to the fund. Which includes the dividend also.
Is that really happening is something thats difficult to check by reading the P/L or balance sheet.
My long pending question is how these AMCs handle taxes & brokerage for each transaction & whether thats part of the ER ?
This is my understanding as well, I asked SBI AMC, no reply. I asked few others who said “they think” not sure. Everyone seems to know that dividends go to the unit holder and expenses are deducted. To whom does the net profit of the Fund/ETF goes to. I truly wish Zerodha who is in this business can clarify.
If you say for sure that the net profit of the fund as shown in the respective profit and loss account goes to the unit holder, I got my answers. So it is not only the Dividends and Interest that the unit holder gets, there is other income as well. All this is translated to NAV.
There could be other income for the fund, like let say if a company get moved out of index, its sale could generate income. They also keep some t-bills and other highly liquid investment for some part and the keep derivatives which generate income. Funds have to do all these to keep tracking error in check. You know index provider assumes situation to be ideal but these companies get to deal with impact cost, brokrages etc. So they have to keep some of their investment in something that can cover that cost. And for sure that gets reflected in their NAV. If the don’t do that, their tracking error will go up…
