In Mutual Funds, More and more people are investing their hard-earned money. This is about 7.5 lakh crores of funds from people like you and me. Of this, the equity Mutual Funds are along about 4.5 lakh crores. Here we are giving an open secret for mutual fund back door fees.
Here is the not so open secret behind these funds
More than 90% of equity mutual funds investments from people like us (or retail investors) are made via brokers. The commissions paid are huge. About Rs 70,00,00,00,000. Rs 7000 crores. More than a billion dollars. These commissions are a combination of upfront incentives (up to 2%) and yearly cut (also called trail commission). These are paid entirely through the backdoor. You may be led to believe that you are not paying anything ‘extra’. These percentages appear small but after inflation (and possibly taxes), the investor often ends up making less than the broker!
The Billion Dollars Secret is Mutual fund back door fees
Over the years these commission costs could represent anywhere between 20% to 60% of your final investment corpus. Think of it, half of our retirement money has already been given out to brokers, before you even begin to enjoy it? How bad is that? Sadly customers are cheated by almost all who have access to them. This includes banks which control the first access point to customers. Then come various distributors and intermediaries (‘Brokers’). The worst thing is that most of them simply hide these fees; hardly anyone talks about them.
Fortunately the industry regulator SEBI stepped in and made sure that all Mutual Fund companies launch “Direct Plans” where zero commission is paid to brokers. With the help of Registered Advisors or directly, investors can select mutual funds and escape these indirect charges that eat away at their hard-earned money.
The charges that are levied when the units are being purchased. The mutual fund would sell the unit price higher than the NAV. The mutual fund would buy back the units at a rate lower than the NAV. There are no fixed exit loads which are charged. It varies based on the scheme. The current practice is the funds could charge anyway from 0.50% to 3.00% depending on the holding period.