Understanding expenses in mutual funds and stock markets

However, a mutual fund still has a plethora of costs which are cumulated and apportioned to the NAV on a daily basis. This is the total expense ratio (TER).

Mar 02, 2019 10:03 IST India Infoline News Service

Balance sheet
Any investment has a cost because investments have to be administered and also managed. When you buy mutual funds, you don’t pay entry loads post August 2009. However, a mutual fund still has a plethora of costs which are cumulated and apportioned to the NAV on a daily basis. This is the total expense ratio (TER). The TER has costs that are unconditional and are imposed uniformly across all funds in that particular category.
Expenses in case of mutual funds
All mutual fund investments entail a cost: be it equity, debt, index, or balanced. It is just that the TER differs based on the complexity of fund management involved. That is why equity funds have the highest TER, while money market funds have the lowest. Let us look at some key expenses.
  • The asset management fee is charged for managing the funds on behalf of investors. The management fee is normally the highest for active equity funds, but much lower in case of passive index funds.
  • Registry fees are payable by the AMC to the registrar for maintaining the records of unit holders and effecting transactions. In India, CAMS and Karvy are the two major MF registrars.
  • Audit fees and legal fees are payable for the routine audit and other compliance-related issues including SEBI and RBI filings.
  • Transaction charges are the charges that are paid by the fund for transacting in equity, debt, and money markets.
  • Marketing and branding fees are normally head-office charges for promoting the AMC brand and for larger marketing campaigns.
  • Distribution and trail commissions are a large component and are debited to the TER only for regular plans. If you want to save this cost, opt for Direct Plans, which entail lower TERs compared to regular plans.
  • STT on redemption of equity funds is a mandatory charge to be levied on all equity fund redemptions. STT is not part of TER.
  • Exit loads are conditional on the holding period, and equity funds redeemed before 1 year are normally subjected to exit load. Exit loads are also outside TER.
  • Except STT and Exit Loads, all other costs are consolidated into TER.
Expenses in case of equity market trading
  • When you buy or sell shares in the equity market, there are a plethora of costs that get debited to your contract note.
  • Brokerage is charged based on the specific plan agreed with the broker for equity delivery, intraday, futures, and options.
  • Securities transaction tax (STT) is levied on both legs of delivery transactions. However, for intraday, futures and options, STT is levied only on the sell side.
  • Transaction charges are payable to the exchange for all trades. In case of equity delivery, the exchange transaction charges are 0.00325% of the transaction value on NSE. In addition, SEBI also charges a turnover fee of Rs15/cr of value.
  • Goods & Services Tax (GST) is levied at 18% of aggregate of brokerage costs and transaction charges.

Finally, stamp duty is levied at the extant rates in each state. In the state of Maharashtra, the rate of stamp duty on equity delivery transactions is 0.01% of the transaction value.
In addition to the above expenses, there is capital gains tax that is payable on equities and mutual funds, however, this is something very specific to individuals.

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