NAV, Expense Ratio, Exit Load

You want to invest in a Mutual Fund. You see: "NAV: ₹145.32, Expense Ratio: 0.85%, Exit Load: 1% if redeemed before 1year"

What do these mean? Should you invest or run?

1. NAV (Net Asset Value)

NAV = The "price" of 1 unit of a Mutual Fund.

Formula:

NAV = (Total Assets - Total Liabilities) / Total Units Outstanding

Example:

• Fund has ₹100 Crores in stocks.
• Liabilities: ₹5 Crores (Management fees, etc.).
• Total Units: 65 Lakh.
• NAV = (100 - 5) / 0.65 = ₹146.15

Myth vs Reality

Myth	Reality
Low NAV = Cheap (Better deal)	NAV doesn't matter for returns!
High NAV = Expensive	₹10 NAV fund can give same returns as ₹500 NAV fund

Example:

• Fund A: NAV = ₹10. You invest ₹10,000. Units = 1,000.
• Fund B: NAV = ₹500. You invest ₹10,000. Units = 20.

Both funds grow 10%:

• Fund A: NAV = ₹11. Your value = ₹11,000.
• Fund B: NAV = ₹550. Your value = ₹11,000.

Returns are same!

When is NAV Updated?

• Daily at the end of market hours (around 9 PM).
• If you invest at 2 PM, you get the NAV of that evening.
• If you invest after 3 PM, you get next day's NAV.

2. Expense Ratio (The Silent Killer)

Expense Ratio = Annual fee charged by the fund house.

What It Covers:

• Fund Manager's salary.
• Research team.
• Marketing, distribution.
• Transaction costs.

Formula:

Expense Ratio = (Total Fund Expenses / Total Assets) x 100

Example:

• Fund Size: ₹1,000 Crores.
• Annual Expenses: ₹8.5 Crores.
• Expense Ratio = (8.5 / 1,000) x 100 = 0.85%

Why It Matters (The Compounding Trap)

Scenario:

• You invest ₹10 Lakhs for 20 years.
• Expected Return: 12% p.a.

Expense Ratio	Final Corpus	You Lose
0.5%	₹88.5 Lakhs	-
1%	₹82.4 Lakhs	₹6.1 Lakhs
2%	₹71.3 Lakhs	₹17.2 Lakhs

A 1.5% difference in expense ratio can cost you ₹15+ Lakhs over 20 years!

What's a Good Expense Ratio?

Fund Type	Reasonable	High (Avoid)
Index Funds	less than 0.3%	greater than 0.5%
Actively Managed Equity	0.5% to 1.5%	greater than 2%
Debt Funds	less than 0.5%	greater than 1%

SEBI Limits (Max allowed):

• Equity Funds: 2.25%
• Debt Funds: 2%

Direct vs Regular Plan

Plan	Expense Ratio	Why?
Direct	0.85%	No distributor commission
Regular	1.65%	Includes broker commission

Always choose Direct Plans. Save 0.5-1% every year!

3. Exit Load (The Breakup Fee)

Exit Load = Penalty if you redeem units too early.

Common Structure:

• Exit Load: 1% if redeemed before 1 year.
• No Exit Load after 1 year.

Example:

• You invested ₹1 Lakh.
• After 6 months, NAV rises. Your value = ₹1.1 Lakhs.
• You redeem.

Calculation:

• Exit Load = 1% of ₹1.1 Lakhs = ₹1,100.
• You receive = ₹1,10,000 - ₹1,100 = ₹1,08,900.

Why Does It Exist?

• To discourage short-term trading.
• Protects long-term investors (Frequent buying/selling increases fund costs).

Special Cases:

Fund Type	Exit Load
Liquid Funds	0% (Fully liquid)
ELSS	Lock-in 3 years (No exit allowed)
Ultra Short-Term	0.25% if redeemed before 7 days

4. The Hidden Cost: Transaction Charges

On top of Expense Ratio and Exit Load, some platforms charge:

• Transaction Fee: ₹10-150 per SIP/purchase (Zerodha Coin, Groww, etc.).

Solution: Use AMC Direct websites (100% free) or platforms with no transaction fee.

7-Day Action Plan

Day 1: Check the Expense Ratio of your current mutual funds. If > 1.5% for equity, switch to Direct Plans.
Day 2: Log in to your fund's AMC website (e.g., hdfcfund.com). Compare Direct vs Regular NAV.
Day 3: Calculate how much you've lost to high expense ratios. It's shocking!
Day 4: Read the fund's Scheme Information Document (SID). Exit Load and Expense Ratio are mentioned there.
Day 5: Switch from Regular to Direct. Call your broker or do it online (No exit load if switching within same fund).
Day 6: Check "Total Expense Ratio (TER)" on fund fact sheet. It includes all hidden costs.
Day 7: Set a reminder to review expense ratios annually. Fund houses can increase it (With AMC approval).

Quiz

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💡 Final Wisdom: "A 1% fee might seem small. But over decades, it's the difference between retiring rich and retiring comfortable. Choose wisely."