Your queries- Mutual Funds: Expense ratio reflects charges multi-asset allocation funds pay
Since multi asset allocation funds move money among various asset classes, though the investor is not charged fees for such switching and entry/exit charges for the same, do the mutual funds have to pay switching charges internally? How are these costs disclosed?
Given the pass-through status of mutual funds, investors are not required to pay any taxes or charges at the time of purchase or sale of any security in the portfolio by the manager of the multi-asset fund. However, managers are required to pay STT (securities transaction tax) on the purchase or sale of securities on registered stock exchanges, which is borne by the fund. Also, in the case of multi-asset funds investing into other funds within the AMC or funds across AMCs, the allocation would entail the expense ratio of the fund being invested in. Exit load charges (if applicable) would apply when the multi-asset fund redeems any allocation from a particular fund. Sale of equity-oriented mutual fund units also entails STT charge, which is borne by the fund. Also, buying into another fund entails a minimal stamp duty charge of 0.005%. The exit load and expense ratio details for all funds can be found on the respective AMC websites.
As many NFOs are being launched now, should I invest in one having a unique investment theme?
Before investing in an NFO, evaluate the unique proposition that the fund offers and the risk-reward on offer due to any potential diversification benefit. Understand the return drivers behind the asset class and the investment approach followed. Focus on how an investment impacts the overall portfolio and the underlying costs involved. Evaluate the valuation of the investment relative to its past and other assets in the opportunity set. Valuations play a crucial role while entering any asset class /security. Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa.
Themes / sectors that have outperformed significantly in recent times may not offer attractive risk-reward prospects going ahead. One should be wary of investing in such ‘trending’ or ‘hot’ themes. Allocation to any alternative asset classes with a short performance history should be capped (around 5%) and in line with your risk appetite.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to email@example.com