Various charges while buying Mutual funds

 

Mutual funds are investment vehicles that pool money from multiple investors to invest in a portfolio of stocks, bonds, or other securities. When investors invest in mutual funds, they are charged various fees and expenses. Understanding these charges is essential as it can affect the overall returns that an investor receives from their investments.

 

In this article, we will explore various charges associated with mutual funds.

 

1.       Expense Ratio

 

Expense ratio is the most common fee charged by mutual funds. It represents the cost of managing the fund, including administrative expenses, operating costs, and management fees. The expense ratio is expressed as a percentage of the fund's assets and is deducted from the fund's returns.

For example, if a fund has an expense ratio of 1%, and the fund generates a return of 10%, then the net return to the investor would be 9%.

 

Expense ratios can vary significantly from one fund to another, depending on the type of fund and the investment strategy. Actively managed funds typically have higher expense ratios than passively managed funds, such as index funds.

 

2.       Sales Load

 

Sales load, also known as entry load, is a fee that is charged by mutual funds at the time of purchase of units. In India, the Securities and Exchange Board of India (SEBI) has prohibited mutual funds from charging sales load on mutual fund units since August 2009.

 

Prior to August 2009, mutual funds in India used to charge sales load, which was deducted from the initial investment amount. The sales load charged by mutual funds used to range between 0.25% and 2.50%, depending on the mutual fund scheme and the investment amount.

 

However, with the introduction of SEBI's mutual fund regulations in 2009, the practice of charging sales load was discontinued. The objective of prohibiting sales load was to protect the interests of investors by ensuring that they receive the full value of their investment.

 

Instead of sales load, mutual funds in India are now allowed to charge an exit load, which is a fee charged at the time of redemption of mutual fund units. The exit load is usually charged to discourage investors from redeeming their units too soon after purchase.

 

The exit load charged by mutual funds varies from scheme to scheme and can range from 0.25% to 2% of the redemption value, depending on the time period for which the units were held.

 

It is important for investors to note that mutual funds can still charge other expenses such as the expense ratio, which covers the fund management expenses, administrative expenses, and other expenses related to the operation of the mutual fund scheme.

 

In conclusion, sales load on mutual funds has been prohibited in India since August 2009. Instead, mutual funds in India are allowed to charge an exit load, which is a fee charged at the time of redemption of mutual fund units. It is important for investors to be aware of the various expenses charged by mutual funds, including the expense ratio and exit load, while investing in mutual funds.

 

3.       Redemption Fees

Redemption fees are fees charged by some mutual funds when an investor sells their shares in the fund within a certain period after purchasing them. Redemption fees are typically charged to discourage short-term trading in the fund and to protect long-term investors.

Redemption fees can vary from one fund to another, and they are usually a percentage of the value of the shares being redeemed.

 

For example, a fund may charge a 1% redemption fee if an investor sells their shares within 90 days of purchasing them.

 

4.       STT (Securities Transaction Tax)

 

In India, Securities Transaction Tax (STT) is a tax that is levied on the purchase and sale of securities, including mutual funds. STT was introduced in 2004 to replace the earlier system of taxing securities transactions, which included taxes such as the capital gains tax and the securities transaction tax.

STT is levied on both the buyer and the seller of securities, and the rates vary depending on the type of security and the type of transaction. In the case of mutual funds, STT is levied on the redemption of units.

 

The current rate of STT on the redemption of mutual fund units is 0.001% of the redemption value. For example, if an investor redeems Rs. 10,00,000 worth of mutual fund units, the STT charged would be Rs. 10 (0.001% of Rs. 10,00,000).

 

It is important to note that STT is a direct tax and is paid by the investor. Unlike other charges such as the expense ratio or sales load, which are deducted from the fund's returns, STT is charged separately and is payable by the investor.

 

Investors can claim a deduction for STT paid on the redemption of mutual fund units while calculating their capital gains tax liability. The STT paid can be deducted from the sale price of the mutual fund units to arrive at the net sale price, which is then used to calculate the capital gains tax liability.

 

5.       Other Expenses

In addition to the fees mentioned above, mutual funds may also charge other expenses, such as custodial fees, transfer agent fees, legal fees, and audit fees. These expenses are usually included in the fund's expense ratio.