Recently in last couple of months, SEBI has issued some circulars to bring in about some changes in the area of mutual funds. These are imposition of stamp duty on mutual fund, new rules for Multi cap funds, Change in margin system and modifying NAV rules for mutual fund schemes.
Let us discuss the first one in detail in today’s blog.
Stamp duty to be applicable on mutual fund – The first circular which was passed was regarding the imposition of stamp duty on mutual funds. From 1 July 2020, stamp duty is imposed on the purchase of mutual funds whether it is debt, Equity, Gold or hybrid mutual fund.
Important point to note here is that it is imposed only on purchase transactions. This means when you invest into a mutual fund, stamp duty will be levied.
In other words, we can say that stamp duty will be applied on the following transactions where investment is made:-
1. Lump sum investment
2. Systematic investment plans (SIPs) and
3. Systematic transfer plans (STPs),
4. Dividend reinvestment
So whether your investment is a lump sum investment or SIP, stamp duty will be applicable. Not only fresh investment from your pocket but also if there is an STP (Systematic Transfer plan), in the scheme in which the funds are switched to is considered to be a new investment in that particular scheme and thus stamp duty will be levied. Same logic is applied to dividend reinvestment, every dividend that is declared and reinvested in the same scheme will be open to stamp duty charges.
Like I said above it is imposed only on purchase transactions. This means it is not applicable on the redemption of units.
Now the next question can be “How much do we have to pay as stamp duty charges?”
Well, the rate applicable is 0.005% on the purchase or switch in amount and 0.015% for transfers between demat account i.e. ETF units. To understand it better, let us take an example.
If an investor made an investment of Rs. 1,00,000, stamp duty paid will be Rs.5. (0.005%*1,00,000)
As it is a one-time expense at the time of purchase, it is more like an entry load. SEBI had done away with the practice of charging entry load for mutual funds since 2009. However, with the introduction of this move of levying stamp duty on purchase transactions, it’s more like a return of entry load for an investor. But the impact will not be much for long term investments. This is because the returns may always be higher in long term as compared to short term.
Usually debt investments are made for short term specifically, liquid funds. So here the impact would be more. If you are doing investment for the long term then you will be least affected with this new stamp duty imposition.
It is further recommended to not switch your funds very frequently especially in a short term and also try to avoid dividend reinvestment option. You may opt for growth option instead to prevent stamp duty.
As the stamp duty will be auto deducted by the registrar and transfer agent (RTA) of the mutual fund when you buy units, you don’t have to pay it separately. You will get fewer units in the mutual fund due to the deduction. For example, instead of 50 units, you may end up with 49.98 units due to the stamp duty deduction.
Soon after this circular, there was a confusion regarding whether this will be applicable to AIFs or not.
SEBI immediately clarified that stamp duty tax is also applicable on units of AIFs.
In addition, SEBI has asked AIFs to appoint registrar and transfer agents (RTAs) to collect stamp duty tax. But, till they appoint RTAs, AIFs can keep the collected stamp duty tax in a designated bank account. With this circular, AIFs will be in line with mutual funds, ULIPs and NPS.
There is incidence of double stamp duty taxation on AIFs. How?
AIF investors will have bear the burden of stamp duty tax twice – first when he purchases mutual fund units as an investor and second at portfolio level when the fund manager executes transactions.
It is important to understand that the first taxation will be levied upfront whereas in the second incident it will be adjusted to scheme’s TER (Total Expense ratio).
Now let us see the applicable rate?
The government has imposed the same percentage of stamp duty tax of 0.005% on purchase of units of AIFs. This basically means that AIF players will allot units only after deducting stamp duty tax of 0.005% on invested amount.
At portfolio level, the government has imposed stamp duty of 0.0001% on transfer and re-issue of equity and equity related instruments. For debt instruments, stamp duty tax of 0.015% will be levied on delivery transactions and 0.003% on intraday and option transactions.
In case of equity IPOs and fresh issuance of debt papers, the government has imposed stamp duty tax of 0.005%.
The stamp duty tax on futures both equity & commodity and currency & interest rate derivatives would be 0.002% and 0.0001, respectively.
Please note that there will be no stamp duty tax on transactions of government securities. However, the government would levy stamp duty of 0.00001% on transaction of repo on corporate bonds.
With this I hope you have a better clarity on imposition of stamp duty on your investments.
Mutual Funds are great investment options that allow you to experience the return potential of the capital market and that too at very little investments. However, they come with associated charges and hence one should know the types of such charges on the scheme before investing. The expenses associated with a mutual fund scheme are either one-time charges or recurring charges. The expenses eat into your investments and affect the returns. That is why you should understand the expense structure. Here are the different types of expenses incurred in mutual fund investments –
Let us understand each one in details –
- Entry Load :- Entry load is applicable when one first invests in a mutual fund scheme. However, thanks to SEBI guidelines, currently, there is no entry load applicable on mutual fund investments.
- Exit Load :- Exit load is applicable at the time of redemption. When you redeem the mutual fund, the exit load is deducted from the applicable NAV and your units are redeemed at the reduced NAV. For instance, if there is an exit load of 1% and the NAV on redemption date is Rs.100, you would be able to redeem your units at Rs.99 after deducting the exit load of 1%. However, there are stipulated tenures in mutual fund schemes after which no exit load is charged. For instance, the scheme might not charge the 1% exit load if you redeem your investments after 1 year. Different Mutual fund schemes have different exit load. Exit load is, usually, fixed anywhere between 0% and 3% depending on the mutual fund scheme.
- Transaction Charge :- This charge is applicable only for first-time investment in a mutual fund scheme. The charge is levied only if your investment is Rs.10,000 and above. If you are a new investor to mutual funds, your charge would be Rs.150. If you are an existing investor the charge is reduced to Rs.100. For Systematic Investment Plan (SIP) investors, investing an aggregate of Rs.10,000 of more in SIP, the charge is Rs.100 for existing investors and 150 for new investors.
- Stamp Duty charges : – From 1 July 2020, stamp duty is imposed on the purchase of mutual funds whether it is debt, Equity, Gold or hybrid mutual fund. It is imposed only on purchase transactions. This means when you invest into a mutual fund, stamp duty will be levied.
In other words, we can say that stamp duty will be applied on following transactions where investment is made:-
- Lump sum investment
- Systematic investment plans (SIPs) and
- Systematic transfer plans (STPs),
- Dividend reinvestment
It is not applicable on the redemption of units.
Rate applicable – 0.005% on the purchase or switch in amount and 0.015% for transfers between demat account i.e ETF units. To understand it better, lets say on an investment of Rs. 1,00,000, stamp duty paid will be Rs.5.
As it is a one-time expense at the time of purchase, it is more like an entry load. But the impact will not be much for long term investments. Usually debt investments are made for short term specifically, liquid funds. So here the impact would be more.
If you are doing investment for the long term then you will be least affected with this new stamp duty imposition. It is recommended to not switch your funds very frequently especially in a short term and also try to avoid dividend reinvestment option. Opt for growth option instead.
- Total Expense Ratio
Mutual fund schemes pool money from different investors. Thereafter, an Asset Management Company (AMC) manages the pooled money and invests it in different instruments. The AMC incurs various charges in managing your investments and providing returns. Charges like fund management fees, marketing and selling expenses. Also, administrative expenses, registrar fees, custodian fees, trustee fees, etc. are incurred by AMCs. These charges are recovered from you in the form of Total Expense Ratio (TER) or Fund Management Charges. TER is expressed as a percentage and calculated as follows –
TER = (Total expenses incurred in a year/Total assets of the fund)*100
SEBI has listed the maximum TER which AMCs can charge. It is as follows* –
|Average Net Assets for a week||TER Limits for Equity Schemes||TER Limits for Debt Schemes|
|For the first Rs.100 crores||2.50%||2.25%|
|For the next Rs.300 crores||2.25%||2%|
|For the next Rs.300 crores||2%||1.75%|
|On the remaining assets||1.75%||1.50%|
Furthermore, there is an additional 30bps on the TER which AMCs can charge if the net inflows from beyond top 15 cities are at least 30% of the gross inflow of the scheme or 15% of the scheme’s total AUM (Assets under Management) since inception, whichever is higher.
The NAV of the scheme is calculated after deducting the TER and other liabilities. A lower TER is better as it increases NAV and ensures higher returns.
These expenses vary across different funds except stamp duty charges and should be borne in mind before you invest. Since the expenses are directly related to your returns you should know all the possible expenses of the scheme before you invest.