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Financial Planner - Answered on Jan 10, 2024

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Asked by Anonymous - Jan 09, 2024Hindi

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What are the various charges a mutual fund company charges customers? How should one invest smartly in order to reduce these costs even while not compromising on returns? What kind of MFs should be avoided in today's environment?

Ans: Mutual fund companies typically levy various charges, including:

• Expense Ratio: This covers the fund's operating expenses and is a percentage of the fund's average net assets. Lower expense ratios are generally better for investors as they reduce the drag on returns.
• Loads: Some funds charge a fee when you buy (front-end load) or sell (back-end load) shares. No-load funds don't have these charges.
• Transaction Fees: These are charged for buying or selling fund shares. Some brokerages may charge these fees for transactions.

To invest smartly and minimise costs without compromising returns:

• Focus on Low-Cost Funds: Look for funds with low expense ratios. Index funds and ETFs often have lower expenses compared to actively managed funds.
• Avoid Loads: Choose no-load funds to avoid paying additional fees for buying or selling shares.
• Consider Direct Investment: Some mutual funds offer direct plans with lower expense ratios than regular plans. These are designed for investors who can manage their investments without a distributor's help.
• Regularly Review Portfolio: Periodically review your portfolio to ensure your investments still align with your goals. Avoid unnecessary trading, as frequent transactions may rack up fees.

As for the types of mutual funds to consider or avoid in today's environment, it depends on your risk tolerance, investment goals, and market conditions. However, some pointers:

• High-Cost, Actively Managed Funds: In recent years, many actively managed funds struggle to consistently beat their benchmarks after accounting for fees. High fees can eat into returns significantly over time.
• Funds with High Turnover: Funds that frequently buy and sell securities may incur higher transaction costs, impacting returns.
• Understand Risky Strategies: Be cautious with funds that employ complex or high-risk strategies, especially if they're not aligned with your risk tolerance or investment objectives.
• Consider Index Funds and ETFs: These passively managed funds often have lower fees and can provide broad market exposure, which could be more cost-effective and suitable for long-term investors.

Always do thorough research or consult a financial advisor before making investment decisions, considering your financial situation, risk tolerance, and investment goals.

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.