Understanding Sale and Repurchase Price in Mutual Funds

In mutual funds, Sale Price and Repurchase Price are key concepts that determine the price at which investors buy or sell mutual fund units. Here’s a detailed explanation of both terms and how they impact mutual fund transactions.

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Sale Price

Definition: The Sale Price is the price at which investors buy mutual fund units. It represents the cost per unit that an investor needs to pay when subscribing to or switching into a mutual fund scheme.

Key Points:

1. No Entry Load:

   • As per SEBI Circular No. SEBI/IMD/CIR No. 4/168230/09 dated June 30, 2009, entry loads (charges for buying mutual fund units) have been abolished for all mutual fund schemes. This means that the Sale Price is now equivalent to the NAV (Net Asset Value) per unit.

2. New Fund Offer (NFO):

   • During an NFO, the Sale Price is typically set at the face value of the unit as specified in the Scheme Information Document (SID) and Key Information Memorandum (KIM). This face value is usually ₹10, but it can vary based on the scheme.

3. Ongoing Offer Period:

   • After the NFO period, mutual funds reopen for subscriptions and redemptions. During this ongoing offer period, investors buy units at the NAV, meaning the Sale Price per unit is the applicable NAV on the subscription date.

Example:

• If the NAV on the day you invest is ₹20, then your Sale Price per unit will also be ₹20.

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Repurchase/Redemption Price

Definition: The Repurchase Price, also known as the Redemption Price, is the price at which a mutual fund buys back units from investors when they redeem their units or switch them to other schemes/plans within the same mutual fund.

Key Points:

1. Includes Exit Load:

   • The Repurchase Price includes any applicable exit load (a fee charged on the redemption of units). If there is no exit load, the Repurchase Price is equal to the NAV.

2. Calculation of Redemption Price:

   • The Redemption Price is calculated using the formula:

     $\text{Redemption Price}=\text{Applicable NAV}\times (1-\text{Exit Load})$

   Example:

   • If the NAV is ₹10 and the exit load is 2%, then:

     $\text{Redemption Price}=\text{₹}10\times (1-0.02)=\text{₹}10\times 0.98=\text{₹}9.80$

3. Exit Load:

   • Exit loads are charged as a percentage of the NAV at the time of redemption. These are designed to discourage short-term trading and cover the costs associated with the redemption process. AMCs (Asset Management Companies) can modify exit load structures or introduce new exit loads, but any changes are applicable only to future transactions, not to existing units.

4. Regulation on Repurchase Price:

   • As per SEBI regulations, the Repurchase Price for open-ended schemes must not be less than 95% of the NAV. This ensures that investors receive a fair value when redeeming their units.

5. Closed-Ended Schemes:

   • Units of closed-ended schemes cannot be repurchased prematurely. Investors can only sell these units on the stock exchange where they are listed, or they may be repurchased at the end of the scheme’s tenure as per the scheme’s terms.

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Conclusion

Sale Price and Repurchase Price are essential components of mutual fund transactions. The Sale Price represents the cost of acquiring mutual fund units and is typically aligned with the NAV during ongoing periods. The Repurchase Price reflects the amount investors receive when redeeming their units, adjusted for any applicable exit loads. Understanding these concepts helps investors make informed decisions about their mutual fund investments and manage their costs effectively.

Understanding Total Expense Ratio (TER) in Mutual Funds

 

The Total Expense Ratio (TER) is a crucial metric for investors to evaluate the cost-effectiveness of mutual fund schemes. It encompasses all operating expenses incurred by the mutual fund for managing the scheme. Here’s a detailed explanation of what TER is, its components, and its implications for investors.

What Is Total Expense Ratio (TER)?

Definition: Total Expense Ratio (TER) represents the percentage of a mutual fund's assets that is used to cover operating expenses. These expenses include a range of costs associated with running the fund, such as management fees, administrative expenses, transaction costs, and other operational costs.

Components of TER:

• Investment Management Fees: Fees paid to fund managers for managing the fund’s investments.
• Administrative Expenses: Costs related to the day-to-day operations of the fund.
• Sales and Marketing Costs: Expenses incurred for promoting and selling the fund.
• Registrar Fees: Costs associated with record-keeping and shareholder services.
• Custodian Fees: Fees for the safekeeping of the fund’s assets.
• Audit Fees: Costs for auditing the fund’s financial statements.

Calculation of TER:

TER is calculated as a percentage of the mutual fund’s average daily net assets. The formula is:

$\text{TER}=\left(\frac{\text{Total Expenses}}{\text{Average Net Assets}}\right)\times 100$

• Total Expenses: Sum of all operating expenses of the fund.
• Average Net Assets: Average value of the fund’s assets over a specified period.

Impact on NAV: The TER directly affects the Net Asset Value (NAV) of a mutual fund. Higher expenses reduce the NAV, while lower expenses help in maintaining a higher NAV. Hence, the TER is a significant factor to consider when selecting a mutual fund, as it impacts the fund’s overall performance and investor returns.

SEBI Regulations on TER:

Under SEBI (Mutual Funds) Regulations, 1996, mutual funds are permitted to charge operating expenses, but these are capped by regulatory limits. As of April 1, 2020, SEBI revised the TER limits based on the Assets Under Management (AUM) for different types of funds:

For Equity Funds:

• On the first ₹500 crores: 2.25%
• On the next ₹250 crores: 2.00%
• On the next ₹1,250 crores: 1.75%
• On the next ₹3,000 crores: 1.60%
• On the next ₹5,000 crores: 1.50%
• On the next ₹40,000 crores: Reduction of 0.05% for every increase of ₹5,000 crores or part thereof.
• Above ₹50,000 crores: 1.05%

For Debt Funds:

• On the first ₹500 crores: 2.00%
• On the next ₹250 crores: 1.75%
• On the next ₹1,250 crores: 1.50%
• On the next ₹3,000 crores: 1.35%
• On the next ₹5,000 crores: 1.25%
• On the next ₹40,000 crores: Reduction of 0.05% for every increase of ₹5,000 crores or part thereof.
• Above ₹50,000 crores: 0.80%

Additional Charges: Mutual funds can charge up to an additional 30 basis points (bps) if new inflows from retail investors from beyond top 30 cities (B30 cities) constitute:

• At least 30% of gross new inflows in the scheme, or
• 15% of the average assets under management (year-to-date) of the scheme, whichever is higher.

This provision is intended to encourage inflows from tier-2 and tier-3 cities.

Why TER Matters:

1. Cost Efficiency: A lower TER means lower costs for the investor, which can contribute to better net returns. Conversely, higher TERs reduce the returns to investors.

2. Comparison Tool: TER allows investors to compare the cost structures of different mutual funds and choose the most cost-effective option.

3. Transparency: SEBI regulations require mutual funds to disclose the TER on a daily basis, ensuring transparency and enabling investors to make informed decisions.

Disclosure Requirements:

Mutual funds are mandated to disclose the TER of all their schemes daily on their websites as well as on the Association of Mutual Funds in India (AMFI) website. This regular disclosure ensures that investors have up-to-date information regarding the costs associated with their investments.

Conclusion

The Total Expense Ratio (TER) is a critical factor for mutual fund investors, influencing both the cost of investment and the potential returns. By understanding the TER and its components, investors can make more informed choices, balancing cost with expected returns. Regularly reviewing the TER of mutual funds and comparing it with other options helps in optimizing investment decisions and enhancing overall investment efficiency.