‘Kaching’ All The Costs Associated With Mutual Funds

Mutual Funds are a great investment but they aren’t free of cost. Apart from your investment amount you also have to pay a fee and some charges to the mutual fund company for managing your funds. Although these might seem minimal, over a period of time they can affect your profits, so knowing about them can help you take investment decisions. 

By nature of the payment these charges are classified as one time and recurring charges:

ONE TIME CHARGES:

  1. Entry Load: When an investor purchases a scheme they are charged an entry load that is collected to cover costs of distribution by the company. Different mutual funds houses charge different fees as an entry load. In India, this charge was usually of about 2.25% of the value of the investment. From August 2009 this ‘entry load’ charge has been removed.
  2. Exit Load: To discourage investors from exiting their mutual funds prematurely an exit load is applied to units of mutual funds if they are sold before a certain period of time. The amount of this load and the period of the load is stated in the investment scheme document.  Example: Equity mutual funds impose a 1% exit load if units are sold within one year. Liquid funds do not have an exit load.
  3. Transaction charges: Since 2011 a one-time charge of Rs. 150 for new investors and Rs. 100 for existing investors is applicable on your mutual fund investments if they are above Rs. 10,000. In case of an SIP above Rs.10,000, a transaction charge of Rs.100 is payable in 4 equal instalments.

RECURRING CHARGES:

  1. Expense Ratio: The expenses incurred on professionally managing your fund, meeting advisory fees, operational costs, registrar and transfer agent fees, legal and audit fees, agent/ sales commissions, etc. are borne by an investor and not the mutual fund company or asset management company. This is charged daily and the daily NAV is adjusted accordingly. All expenses related to mutual funds are together called Total Expense Ratio or TER.
  2. Indirect Charges: When an AMC suggests a new fund offer a charge of 6% of the total net assets adjusted over 5 years is levied. There are also few other indirect such as costs for opening a demat account, maintaining the demat account, brokerage charges, etc.

amc

nav.jpg

amc1.jpg

TAXES ON YOUR MUTUAL FUNDS:

  1. Capital Gains Tax: The gains made on mutual fund units are divided into short term and long term gains depending on how long they are held for. Based on this they are taxed as follows: 

tax on funds.jpg

Indexation and balanced funds

indexation-and-balanced-funds2.jpg

Apart from capital gains tax mutual funds are also subject to:

  1. Securities Transaction Tax (STT): This is a minimal tax fixed by the central government on the sale of equity or balanced mutual fund units. The rate varies according to the type of securities and transaction. There is no STT on the sale of debt fund units.
  2. Dividend Distribution tax: Currently dividend from equity mutual funds and balanced mutual funds is tax-free, while dividend from debt mutual funds is taxed at 28.84%. However, after Budget 2018 dividends from equity mutual funds and balanced funds will be taxed at 10%.

amc.jpg

Before picking a mutual fund scheme, consider the implication of these costs and charges. Don’t just pick a scheme that has a low expense ratio check its returns as well. If the returns are worth it then you can go ahead with that scheme. It is best to consult an advisor for this as they will consider all expenses and taxes and suggest a suitable scheme. 


2 thoughts on “‘Kaching’ All The Costs Associated With Mutual Funds

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s