NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

Costs, Taxation and Other Scheme Selection Factors for NISM Mutual Fund Distributors

Updated 11 October 2026 · Fact-checked

Scheme selection factors beyond returns are costs (total expense ratio and loads), plan choice (direct or regular, growth or IDCW), tax impact and quality of the fund house and portfolio. You compare what the investor actually keeps after costs and tax, and match it to the investor's need, horizon and risk.

Understand Costs, Taxation and Other Scheme Selection Factors

Returns shown for a scheme are after the expense ratio. The total expense ratio (TER) is the annual cost of running the scheme, charged as a percentage of assets and deducted daily from the NAV. You never see a bill. You only see a lower NAV. Over many years, even a small difference in TER compounds into a large difference in wealth.

Loads are charges on units. An exit load is charged when you redeem within a stated period, and it is deducted from the redemption value. No entry load is allowed on mutual fund units; since 2009 the distributor is paid by the investor through a separately agreed fee or by the scheme through the TER. Exit load can be useful to discourage early exit, so check the load period against the investor's horizon.

Plan choice: A regular plan carries distribution cost inside the TER, so its TER is higher. A direct plan is bought without a distributor and has a lower TER, hence a higher NAV over time. The portfolio is the same in both. A distributor earns commission only on regular plans, so you must explain the cost difference and the value of advice honestly.

Option choice: In the growth option, gains stay in the scheme and the NAV rises. In the IDCW (Income Distribution cum Capital Withdrawal) option, the fund pays out part of the investor's own money or gains, and the NAV falls by the amount paid. IDCW is not a bonus and is not guaranteed. Neither option is better in itself. Growth suits long-term wealth building and deferred tax. IDCW suits an investor who needs periodic cash, though an SWP is often more flexible.

Tax and quality: Investors should compare post-tax returns, since equity-oriented and other funds are taxed differently, and IDCW is taxed in the investor's hands at the slab rate. Also look at the fund house's track record, process, size and governance, and at portfolio quality, such as concentration, credit quality and turnover. Past returns alone do not predict future returns.

Key formulas to remember

Net return after costs: Net return ≈ Gross portfolio return − TER; Reported NAV returns are already net of TER. Do not deduct it again.
Exit load amount: Exit load = Redemption value at NAV × Load %; Applies only if units are redeemed within the load period. Payout = value − load.
Entry load: Entry load = 0; Entry load is not permitted. Distributor fees are not charged as an entry load.
IDCW effect on NAV: NAV after payout = NAV before payout − IDCW per unit; The payout comes out of the investor's own money. Total value is unchanged before tax.
Direct vs regular: TER (regular) = TER (direct) + distribution cost; Same portfolio and same manager. Only costs differ, so direct NAV is higher.

How to solve Costs, Taxation and Other Scheme Selection Factors questions

Use this method for any question on costs, plan or option choice, tax and selection factors.

1Identify what is asked: a cost, a plan or option, a tax effect or a selection criterion.
2Note the investor's need, horizon and risk profile given in the question.
3For cost questions, check whether the figure is already net of TER, and whether the load period applies.
4For plan or option questions, recall what differs: regular has higher TER; IDCW reduces NAV by the payout; the portfolio does not change.
5For tax questions, ask whether the gain is taxed on redemption or on receipt of IDCW, and in whose hands.
6Remove options that promise assured returns, allow entry load, or treat past returns as proof.
7Choose the option that is correct as a rule and fits the investor's situation.

Quickest way: Rule-first elimination

When to use it: Use for statement-type and scenario MCQs when time is short.

Spot key words: entry load, direct, IDCW, TER, exit load.
Apply the fixed fact: no entry load; direct has lower TER; IDCW lowers NAV; portfolio same across plans.
Strike out options with absolute words like always, guaranteed or best.
For calculations, do one multiplication: value × load % or NAV change by payout.
Pick the remaining option that matches the investor's horizon.

Common mistakes in Costs, Taxation and Other Scheme Selection Factors

Thinking a direct plan has a different portfolio from the regular plan.
Different names and NAVs suggest different schemes.
Fix: Remember both plans hold the same portfolio under the same manager. Only the expenses and so the NAV differ.
Treating IDCW as extra income or a bonus.
The word dividend suggests profit sharing on top of returns.
Fix: The NAV drops by the payout. It is a return of the investor's own money or gains, not an addition, and it is not assured.
Believing an entry load can be charged.
Older material and bank products show upfront charges.
Fix: Entry load is not allowed on mutual fund units. Only exit load may apply.
Deducting TER again from the reported NAV return.
Students forget that TER is charged daily inside the NAV.
Fix: Published returns are already net of TER. Only compare TERs between similar schemes.
Choosing a scheme only on past returns.
Return tables are the easiest data to read.
Fix: Also check cost, tax, risk, fund house and portfolio quality. Past performance does not guarantee future results.
Applying exit load to every redemption.
Students ignore the load period.
Fix: Load applies only if units are redeemed within the period stated in the offer document.

Worked examples

Example 1

An investor redeems units worth ₹2,00,000 at the applicable NAV. The scheme has an exit load of 1% if redeemed within 12 months. Units were bought 8 months ago. What amount does the investor receive, ignoring tax?

Show the solution

Redemption is within 12 months, so the exit load applies.
Exit load = ₹2,00,000 × 1% = ₹2,000.
Amount received = ₹2,00,000 − ₹2,000 = ₹1,98,000.

Answer: ₹1,98,000

Example 2

A unit in an IDCW option has NAV ₹30 before the record date. The scheme declares IDCW of ₹2 per unit. What is the NAV after the payout, and what does the investor hold in total per unit, ignoring tax?

Show the solution

NAV after payout = ₹30 − ₹2 = ₹28.
Investor receives ₹2 cash per unit.
Total per unit = ₹28 + ₹2 = ₹30, unchanged from before.
So IDCW does not create extra wealth. It only converts part of the NAV into cash.

Answer: NAV falls to ₹28; the total value per unit stays ₹30 before tax.

Exam tips

Memorise the fixed facts: no entry load, direct has lower TER, same portfolio in both plans, IDCW reduces NAV.
In scenario questions, match option to need: long-term wealth points to growth; regular cash flow points to IDCW or an SWP.
Watch for load period details in calculation questions. If the holding period exceeds it, load is zero.
Reject options that call IDCW assured or treat past returns as a guarantee.
Do not guess on tax rates. Use only what the question or workbook states.

Practice questions from Mutual Fund Scheme Selection

Costs, Taxation and Other Scheme Selection Factors: frequently asked questions

What is the difference between direct and regular plans?

Both hold the same portfolio. A regular plan is bought through a distributor and has a higher expense ratio because it includes distribution cost. A direct plan has a lower expense ratio, so its NAV grows faster over time.

Is growth or IDCW better?

Neither is better in every case. Growth lets gains compound and suits long-term goals. IDCW gives periodic payouts, but the NAV falls by the payout and the payout is not guaranteed.

How do expense ratio and exit load affect returns?

The expense ratio is deducted daily from the NAV, so it reduces returns every year. Exit load reduces the redemption amount only if you exit within the load period.

Can a mutual fund charge an entry load?

No. Entry load is not permitted. A distributor is paid through the scheme's TER on regular plans or a fee agreed with the investor.