When it comes to investments, everybody has their own strategies, but one thing most investors agree on is that equities are essential for long term growth. Equity mutual funds provide a great way to add equities to your portfolio because they offer the chance to diversify across many stocks and sectors and enjoy returns through both dividends and capital appreciation.
While the potential of high returns, diversification and professional management can be tempting, equity funds also carry fees and expenses. From management fees to transaction costs, these charges can significantly impact your overall returns. Hence, understanding these costs is crucial to ensure that your money is channelled toward opportunities that align with your financial goals and risk tolerance.
On that note, here is the cost structure of equity mutual funds in detail.
Entry load was a fee that was charged from investors when entering a scheme or joining the company. The purpose of these entry loads was to cover the expenses associated with marketing and distributing mutual funds. However, in August 2009, the Securities and Exchange Board of India (SEBI) abolished the entry load on all mutual funds investment plans.
There is also an exit load charged if you decide to withdraw your investments early from your equity mutual fund schemes. This exit load fee is generally charged if you withdraw your money within a certain period after investing (known as the lock-in period).
The exit load percentage varies, with some fund houses charging 1% – 2% of the redemption value of your units and some even higher. It might be an additional expense, but it helps discourage short-term speculation by investors who are trying to take advantage of market volatility. Also, it may prevent investors from making impulsive decisions that could affect their long-term goals.
Total expense ratio (TER)
The total expense ratio (TER) is a percentage that reflects all the costs associated with operating an investment fund. These costs include management fees, administrative expenses, and other operational charges. As per SEBI regulations, the maximum TER allowed for all equity schemes should not exceed 2.5%. But many schemes have much lower TER as well, depending on asset size, fund type, etc.
A lower TER indicates that more of the returns generated are distributed to investors. As a result, comparing the TERs of different equity funds becomes a strategic step to build your mutual fund portfolio strategically with suitable investments tailored to your financial goals.
Securities transaction tax (STT)
Introduced in the union budget 2004, STT applies only in the case of sales or repurchases of units from equity-oriented Funds (EOF) by mutual funds on recognised stock exchanges. As per the securities transaction tax act (STT Act), equity, derivatives, and units of equity-oriented mutual fund transactions are subject to such taxation.
Tax implications on dividends and on capital gains
Dividends received from any investment in mutual funds, including equity funds are taxable according to your income tax slab rate. Capital gains taxes will also apply when selling units of an equity mutual fund. Long term capital gains (LTCG) taxes are applicable if units have been held for more than 12 months while short term capital gains (STCG) taxes apply if they are held for less than 12 months. LTCG taxes stand at 10% while STCG is taxable at a rate of 15%.
To wrap up
Investing in equity mutual funds can be a great way to diversify your portfolio and build long-term wealth as long as you are aware of the associated costs. The cost can vary greatly depending on how much you are investing, how you invest, and which company you invest with, thus, affecting your returns. To understand what you are paying better, it is recommended to carefully review your consolidated account statement or CAS to get an accurate overview of your fund holding’s costs.