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Keep in mind these five points about mutual fund costs before you invest in a fund

Costs are levied on asset value
Comparing commissions or costs across MFs, ULIPs, bonds and other products? Well, check if the charge is on your initial investment or on the final asset value. It makes a big difference. A distributor commission of 1 per cent on your principal is a very different proposition from a commission of 1 per cent on your asset value. The latter will take a bigger bite out of your wealth, as it includes both your principal and your accumulated returns.

Expense ratio is a moving target
You may decide to buy a fund based on the expense ratio in its latest fact sheet. But while doing so, be aware that the ratio is not cast in stone. The fund is free to peg its expense ratio sharply up or down over time. On the debt side, schemes have even been known to kick off with a very reasonable looking expense ratio, only to hike it the very next year. Nor do fund houses have to take your permission to change their expense structure, as it isn't a 'fundamental attribute' of the scheme. All this means that you don't just have to keep an eye on fund costs when you invest. You also need to check back on costs every time you review your portfolio.

The B15 factor
If you thought your fund's expense ratio is just a function of its size and SEBI's slab structure, you're ignoring the B15 factor. In 2012, SEBI allowed funds to charge upto 0.30 per cent more in annual expense ratios, if they managed to source 30 per cent of new inflows or 15 per cent of existing assets from cities beyond the top 15 (known as B15 cities). Schemes which source lower flows also get to charge extra, on a proportionate basis. With B15 flows gaining traction in the last two years, B15 charges have helped fund houses pad up their expense ratios quite a bit. And it is the B15 factor which results in schemes sporting expense ratios that are not the standard 2.50 or 2.25 per cent, but much higher fractional numbers.

Smart beta ETFs are here
Active funds in India are expensive when compared to their Western peers, but ETFs aren't. While active large-cap funds sported an average expense ratio of 2.33 per cent in June 2016, index funds and ETFs averaged only 0.55 per cent for the same period. Yes, there are 1 per cent plus funds (open end index funds) in the category, but you also have ETFs from HDFC, Invesco, Reliance R*Shares and Edelweiss charging a modest 0.05 to 0.10 per cent a year to passively track indices. With the bourses rolling out 'Smart' indices (playing on Quality, Value, Dividend Opportunities and so on) that use quantitative filters to select stocks, fund houses have also begun to launch ETFs that mimic these indices. These offer a low-cost yet smarter alternative to plain Jane Nifty and Sensex tracking ETFs.