Management and Operating Expenses

Management and Operating Expenses

Mutual funds are investment vehicles that pool money from multiple investors to invest in a diverse portfolio of stocks, bonds, and other securities. The management and operating expenses are the costs incurred by the mutual fund company in managing the fund’s operations, including the salaries and benefits of fund managers, research analysts, and other employees, as well as administrative expenses such as rent, utilities, and legal fees. These expenses are deducted from the fund’s assets and reduce the returns that investors receive.

Management fees are the fees paid to the mutual fund company for managing the fund’s assets. This fee is typically a percentage of the fund’s assets under management and is charged annually. The management fee covers the salaries and benefits of the fund managers and other employees, as well as the cost of research and analysis to make investment decisions. Management fees can vary widely depending on the size and complexity of the fund, with actively managed funds generally charging higher fees than passively managed funds.

Operating expenses are the expenses incurred by the mutual fund company in running the fund’s operations. This includes expenses such as rent, utilities, legal fees, and other administrative costs. Operating expenses are typically expressed as a percentage of the fund’s assets under management and are deducted from the fund’s returns. While management fees are a direct cost of managing the fund’s assets, operating expenses are indirect costs that are necessary to operate the fund’s business. As with management fees, the level of operating expenses can vary widely depending on the size and complexity of the fund.

These expenses are paid each year by the fund and include such things as the manager’s fees, legal and accounting fees, custodial fees and bookkeeping costs. Management fees are levied on the fund by the asset management company for providing investment management and advisory services. The Management Fees that can be charged by the asset management company is subject to following limits.

Weekly average net assets Maximum limit

First Rs 100 crores 1.25 %

Balance 1.00 %

For Index funds, however, the management fees shall not exceed 0.75 % of the weekly average net assets.

For schemes launched on a no-load basis, the AMC is entitled to charge an additional management fee of 1% of the weekly average net assets outstanding in each financial year. For balanced schemes, the applicable limit would depend on whether the scheme is predominantly equity-oriented or debt-oriented. Any other costs and expenses associated with the fund, other than the one specified above has to be borne by the AMC itself, as per the guidelines of the regulator.

The Management Expense Ratio (MER) is the percentage of the fund’s average net assets that these expenses represent. For example, if a Rs. 100 crore fund has Rs. 2 crore in costs for the year its MER will be 2%. MERs can range from under 1% per year for some money market funds to almost 3% for some equity funds.

The higher the MER, the greater the impact on the fund’s performance and the return to its investors. This is because these expenses are removed before the value is reported.