Your Questions- Mutual Funds: Expense Ratio Reflects Fees Multi-Asset Allocation Funds Pay

Since multi-asset allocation funds transfer money between different asset classes, although the investor does not have to pay any fees for such conversion and entry/exit fees for these, do mutual funds have to pay an in-house conversion fee? How are these costs disclosed?
—Tushar Y

Given the transferable status of mutual funds, investors are not required to pay any taxes or fees at the time of the purchase or sale of any portfolio security by the manager of the multi-asset fund. However, managers are required to pay STT (Securities Transaction Tax) when buying or selling securities on registered stock exchanges, which is borne by the fund. In addition, in the case of multi-asset funds investing in other funds within the AMC or in funds across the AMCs, the allocation would involve the expense ratio of the fund in which the investment is carried out. Exit charges (if any) would apply when the multi-asset fund redeems any allocation from a particular fund. Selling shares of equity-oriented mutual funds also incurs STT fees, which are borne by the fund. In addition, buying into another fund incurs a minimum stamp duty of 0.005%. Exit load and expense ratio details for all funds can be found on the respective AMC websites.

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As many NFOs are being launched, should I invest in one with a unique investment theme?
—Deepak Purohit

Before investing in an NFO, consider the unique proposition the fund offers and the risk-reward offered due to any potential diversification benefits. Understand the return drivers behind the asset class and the investment approach followed. Focus on an investment’s impact on the overall portfolio and the underlying costs involved. Assess the valuation of the investment relative to its past and other assets in the opportunity set. Valuations play a crucial role when 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 lately may not offer attractive risk/reward prospects going forward. Beware of investing in such “trendy” or “hot” themes. Allocation to all alternative asset classes with a short track record should be capped (around 5%) and in line with your risk appetite.

The author is Director, Investment Advisory, Morningstar Investment Adviser (India). Send your questions to [email protected]

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