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Scheme Expenses

H.P. Goyal thinks that fund manager fees eat up the fund's NAV. We tell him if he's right or not

My mutual fund investments are mainly in equity schemes. I noticed that when the Sensex moves upwards, many times the NAV of the funds are on the decrease. My basic fear is that the fund manager's fee is eating away potential returns. I see no other reason why the NAV should fall when the Sensex is on a climb. What do you think? Should I continue with my SIP programme or terminate it?
—H.P. Goyal

You are right. An equity fund's net asset value (NAV) may decrease even when the Sensex is on the rise. But you are wrong in assuming that this is result of a high fund management fee.

There are various charges levied by the fund house. The entry and exit load depend on the period of holding and whether you invest through an agent or not. Other charges, which include the annual fund management charge (FMC) and recurring expenses, are incorporated in the daily NAV. So if you invest for a period of six months, you bear the charge for six months and not the whole year.

The mutual fund industry in India is extremely well organized, transparent and regulated. Mutual funds are not allowed to retain some profits and transfer the balance to investors (by increasing the NAV). So be assured that the funds are not over charging you and are efficiently declaring their NAVs on the basis of their daily performance.

Now let's get to why the NAV may decline when the Sensex rises. The Sensex comprises 30 large-cap stocks. So a rise in this index does not imply that all listed stocks have risen. The portfolio of the mutual fund may be totally different from the Sensex basket. It will declare its NAV purely on the basis of the performance of its own stock portfolio on that day. In the recent market crash, there were days when the mid- and small-cap indices crashed despite the Sensex gaining. Naturally, a portfolio laden with mid- and small-cap stocks would see its NAV fall on such days.

Discontinuing the systematic investment plan (SIP) is certainly not advisable. It is perhaps the best way of investing in equity oriented funds. Continue investing and do not worry about these short-term market gyrations.

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