Charges and Taxes on Mutual Fund Schemes

Charges and Taxes on Mutual Fund Schemes

Mutual funds are costly for the small town investor as they can charge higher expense ratio. However, The cost of mutual fund has gradually come down. The Direct plans of mutual fund has made it cheaper.

In this post I have discussed the following Topics

  1. What are the One Time Charges of Mutual Fund Schemes
  2. What Are the Annual Charges
  3. Taxes on Mutual Funds

One Time Charges of Mutual Fund Investment

When you invest in mutual fund scheme, the fund management company charges one-time fees. This one time charge can be also levied at the time of redemption. There are three such charges.

  1. Transaction Charge
  2. Entry Load
  3. Exit Load

Transaction Charge

If you invest through the mutual fund distributor, you have to pay the transaction charge. The mutual fund company deducts this charge from your investment to pay the distributor. That is why if you skip the distributor and invests through the Direct Mutual Fund, there would not be a transaction charge.

Also, there would not be a transaction charge if your investment is less than ₹10,000. Thus, a distributor earns from transaction charge only if you invest ₹10,000 or more.

For an SIP, the total investment is considered for transaction charge. It means, if the sum of all the SIP amount is 10,000 or more, there would be a transaction charge.

The SEBI has set the upper limits of the transaction charge.

Maximum Transaction Charge Minimum Investment Amount For Charge 
New Investor 150 10,000
Existing Investor 100 10,000
SIP 100 (in 4 instalments of ₹25) 10,000 (sum of all SIP)

Entry Load

The mutual fund companies used to charge entry load when you invested in a mutual fund scheme. The Entry Load was a percentage of your investment. This load used to go up to 2% of your investment. Since 2009, the SEBI has abolished the entry load. Now, it does not exist.

Exit Load

This charge is taken when you redeem your mutual fund units. However, this is charged only if you redeem your investment very early. Normally, it is levied if you withdraw your investment within a year.

The exit load varies according to mutual fund scheme. It can be anywhere between 0.5% to 3.0%. There is no exit load on liquid mutual fund schemes as these are short duration money parking mutual funds.

Example of Exit Load Calculation

Suppose you have invested in an equity mutual fund but redeem your money within one year.  In this case, the mutual fund company charges exit load. Suppose, at the time of redemption, the NAV of a unit of mutual fund scheme is ₹80.

Current NAV of mutual fund scheme – ₹80
Exit load  – 1%
1% of ₹80 – $0.8
Discounted NAV of the scheme – ₹80- ₹0.8 = ₹79.20

Thus despite being the NAV of ₹80, you would get the redemption price of ₹79.20 because of the exit load.Mutual Fund Charges

Regular Charges

There are some expenses which are charged during the whole tenure of your investment. These charges are related to the regular expense of a mutual fund scheme.

Expense Ratio

The mutual fund companies have to spend regular amount to run a mutual fund scheme. It incurs the costs of management fees, marketing/selling expenses, Audit charges, Registrar fees, Trustee fees and Custodian fees. So, All these costs are recovered from your corpus. The mutual fund companies take a fixed percentage of the asset under management to meet these cost. This cost is known as the expense ratio.

The expense ratio is told in the annual term. If the expense ratio is 2%, it would mean that mutual fund company would deduct 2% every year from the asset under management.

The mutual fund companies do not wait for one year to deduct this expense, rather it is deducted daily. Thus 2%/365 is deducted daily from the AUM of a mutual fund scheme.

The SEBI has set the limits for the expense ratio of mutual funds. The limit is different for different types of mutual funds. It also varies on the basis of the corpus of mutual fund scheme.

Types of Fund Maximum Expense Ratio
Fund of Fund 2.5%
Index Fund 1.5%
All Other Funds 1.75% -2.5%

Expense Ratio on the basis of AUM

AUM Expense Ratio
First 100 Crore Rupees 2.50%
Next 300 Crore Rupees 2.25%
Next 300 Crore Rupees 2.00%
On the balance of the assets 1.75%

Because of the differential expense ratio on the basis of AUM, the bigger scheme charges lower percentage. So as the scheme grows, the expense ratio comes down.

Further, a fund can also keep its expense ratio lower than the prescribed limit. To understand it better, you can compare the expense ratio of two mutual fund schemes which have different AUM.

Total 1.9% of ₹2000 Cr ₹38 Cr
Expense Structure of a Fund with AUM ₹2000 cr
First 100 Cr 2.5% of ₹100 Cr ₹2.5 Cr
Next ₹300 Cr 2.25% of ₹300 Cr ₹6.75 Cr
Next ₹300 Cr 2.0% of ₹300 Cr ₹6.0 Cr
Balance ₹1300 Cr 1.75% of ₹1300 Cr ₹22.75 Cr
Total 2.33% of ₹300 Cr ₹7.0 Cr
Expense Structure of a Fund with AUM ₹300 cr
First 100 Cr 2.5% of ₹100 Cr ₹2.5 Cr
Next ₹200 Cr 2.25% of ₹200 Cr ₹4.50 Cr

Additional Expense Ratio for Small Cities

A mutual fund scheme can charge additional expense ratio of 0.30% if it collects a good amount from the small cities. The SEBI has set a minimum investment limit from small cities to qualify for the additional expense…….Read more>>

Source:- planmoneytax

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