Costs associated with the Mutual fund investing

Being a mutual fund investor, it is necessary and advisable to be aware of the all charges and costs involved with the mutual fund investment. The various costs involved in mutual fund investment are as follows.

One-Time Charges

Exit load- This is the kind of charge charged by fund houses/AMC when an investor sells off his unit holdings within a specified period of time. AMC’s use these charges as a defensive measure so that investor should not exit the investment avenue without earning considerable profits. The charge is levied according to a pre-defined cut-off period for the holding. The exit load is usually between 1-3 per cent depending on the exit timeline specified by the fund house.

Transaction charges- From the year 2011, the market regulator SEBI has allowed fund houses/AMCs to collect the nominal charges from the investors, if their investment is above Rs. 10,000. This one-time charge is Rs. 150 for new investors, however for existing investors it Rs. 100. For the investment below Rs. 10,000 there is no investment charge. In the case of SIP through which investment is going to be more than Rs. 10,000 then the charge of Rs. 100 is payable in four installments.

Recurring charges- These charges include all the operational charges like marketing/selling expenses, Audit charges, Registrar fees, Trustee fees and Custodian fees. These expenses are adjusted accordingly with net asset value. Also other indirect charges like if an AMC proposes new fund offering then it will incur certain charges, the indirect charges can be 6 per cent of the total net asset and can be adjusted over a period of 5 years.

Taxes

Tax Deducted at Source (TDS)- This is the tax collected by Government of India on returns from the investment. Usually its 10 per cent of returns earned and there would no tax for dividend distribution or repurchase proceed for Indian investors.

Security Transaction Tax (STT)- This tax is levied on the funds which are dealing in equities or equity related instruments. It is collected for buying and selling of securities through stock exchanges.

Dividend Distribution Tax (DDT)- Dividend distributed by equity funds is not taxable, but the dividend distributed by debt funds attract dividend distribution tax.

Capital gain tax- If the investment which is supposed to be for long-term, but cashed in the short-term period are taxed by government under the capital gain tax. For equity, if the holding is more than a year then it is tax-free. While, for debt funds, if the holding is more than three years, the Long term capital gain tax(LTCG) will be 20 per cent over the returns with an indexation benefit.