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Transaction Costs on Investments

  • Rudri Rawell
  • Dec 14 2021
  • 8 minutes
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A wise investor is one who knows all the costs pertaining to his/her investment. These are critical, since they can add up to a substantial amount and eat up on one’s overall return on investment. The investment world, apart from offering financial benefits to investors, comes with a lot of charges in the form of fees, brokerages, commissions, sundry costs, etc. These costs put together can reduce one’s gross earnings, especially for frequent traders or investors.

Here, we have listed the top components of transaction costs for stock market and mutual fund investments. Before investing in either, investors can go through these and estimate the cost factor applicable to their investment.

Transaction costs on stock market investments

Buying or selling of securities on the stock market has to be done via brokers. There are multiple costs associated with such transactions. It is important for an investor to know these while arriving at the actual cost of buying and selling securities. Listed here are the key transaction costs:

1. Brokerage

Brokerage fees are levied by stock brokers on transactions made by an investor. These charges are calculated as per the contract value or at a flat rate as per the agreement between both parties. For intraday trades, the brokerage charges are generally between 0.02% and 0.08% calculated on the trade size.

Also read – Most expensive stocks in India

2. Demat account – annual maintenance charges

Demat account annual maintenance charges can range anywhere between Rs. 300 – Rs. 900 depending on the depository participant. Folio charges may be applied periodically by depository participants. Some DPs may not apply annual charges in the first year of account opening. 

3. Securities transaction tax

STT is a mandatory charge and is applied as a percentage. It is calculated as 0.1% of the transaction value. It is applied on delivery based equity share transactions, intraday buy/sell trades and sell transactions within F&O contracts. 

4. Stamp duty and GST

Stamp duty is collected by the state governments since securities transactions require transfer of security from one party to another. 

GST (both central and state GST) Goods and Services Tax is applied as a percentage on the transaction brokerage charged. The ongoing CGST and SGST rate is 9%.

5. Transaction charges

Transaction charges are decided and levied by stock exchanges for buying and selling of securities. Additionally, SEBI applies a turnover fee at 0.0002% on the total transaction amount.

6. Depository participant

There are two stock depositories in India:

  1. Central Depository Services Limited 
  2. National Securities Depository Limited. 

These depositories apply depository participant or DP charges for maintaining investor transactions in electronic format.

These charges are not directly levied by stock depositories. It is the depository participant who is the brokerage firm or Demat account company that will apply the DP charges to further pay it to the depositories. 

7. Capital gains tax

Capital gains tax is applied to the profit made from the sale of stocks, depending on the holding period. 

  1. Profit made from sale of shares held for one year or lower is subject to short-term capital gains tax @15% + 4% cess. 
  2. Profit made from sale of shares held for more than one year is subject to long-term capital gains tax @10% (provided the profit is above Rs. 1 lakh).

Costs associated to mutual fund investments

There are two types of plans in mutual funds, regular and direct plans. For selling direct plans, fund houses do not incur any expense in the form of commission to agents or distributors. However, in case of regular plans, there is a commission involved. This is why the operating cost of direct plans is lower than regular plans, which translates to a lower expense ratio applicable in direct plans.

When it comes to mutual fund investments, there are two broad categories of charges:

  1. One time charges 
  2. Recurring charges

One time charges:

  1. First-time investors: 
    1. There are no transaction costs if investing directly (without any agents) into a mutual fund. Finity is one such investment platform where you can invest in mutual funds at zero fee & zero commission.
    2. If investing through mutual fund agents but the investment value is under Rs. 10,000 – no charges need to be paid.
    3. If investing through a mutual fund agent and the investment value is above Rs. 10,000 – Rs. 150 is charged. 
  1. Existing investors: 
    1. If investing directly into a mutual fund scheme, without an agent, there is no transaction charge applicable. 
    2. If investing via mutual fund agents but the investment value is below Rs. 10,000 – investors don’t need to pay any charges.
    3. For investments made through agents and whose value is more than Rs. 10,000, a charge of Rs 100 is applicable.
  1. SIP transaction charges: 
    1. If investing directly into a mutual fund SIP without any agent, no transaction is applicable. 
    2. If investing in an SIP through agents, but the investment value is under Rs. 10,000, no charges are applicable. 
    3. If the total investment is above Rs 10,000, Rs. 100 is applicable and is deducted in four equal installments of Rs. 25 each in 2nd, 3rd, 4th and 5th months.
  1. Entry load: These are charges that an investor has to pay at the time of purchasing a fund unit. Some funds may levy this charge. 
  1. Exit load: This fee is charged at the time an investor redeems mutual fund units. Exit load differs across schemes and is generally in the range of 0.25% to 4%. This fee is levied by fund houses to encourage investors to remain invested in the scheme for a certain period or the ‘lock-in period’. 


No charges are applied if the units are redeemed post the lock-in period. For example, a fund unit is priced at Rs. 100 and the exit load is 1%. If the investor decides to redeem it within the lock-in period, he must pay an exit load of Re. 1 for every unit redeemed. 

Ongoing (Recurring) charges: 

Recurring charges are applied by the AMCs for offering different fund management services to investors. These are calculated daily and are applied on the net assets of the fund. Therefore, the daily NAV is declared post deduction of these recurring charges.

Recurring charges are also known as ‘Expense Ratio‘ and it can vary from 1.5% to 2.5% depending on the assets under management of the mutual fund company and type of funds it manages (like equity or debt). 

To understand the expense ratio better, here is an example. If an equity mutual fund fetches 10% returns and has an expense ratio of 2%, the effective return for investors will be 8% (10% less 2%). Thus, the expense ratio has a direct impact on the returns of a mutual fund scheme and must be considered by an investor before investing. 

Conclusion

Knowing the transaction costs on investments can help you in planning your investments. With this, it is easier to identify the right investment avenues that will help in maximising portfolio returns. Whether a new or seasoned investor, each must know the total transaction costs applicable on an investment to be clear how much net return can be expected from investments. 

FAQs

What does an expense ratio consist of?

An expense ratio generally comprises management fees, admin costs, and distribution fees. Management fee acts as a compensation for fund managers. Admin costs are for customer support, general functioning of the fund, etc. Distribution fees are collected for advertising and marketing costs.

Is there a limit on the expense ratios chargeable by mutual funds?

As per SEBI regulations, the total expense ratio permissible to be charged by mutual funds is 2.5% on the first Rs. 100 crores average weekly net assets.

How much money do you need to have to start investing in India?

There is no minimum amount required to begin investing in India. With various mutual fund SIP options, one can begin investing with as little as Rs. 100.

What is the difference between full-service brokers and discount brokers?

Full service brokers provide all-inclusive services that include trading, research advisory, asset management, investment banking, etc. Discount brokers exclusively provide a platform to investors for trading and charge a commission for the same.

Which is better, mutual funds or stock investment?

Mutual fund investments are ideal for beginner investors who do not have an exposure or knowledge of the markets. Stock investments require some basic understanding of the markets and a higher risk appetite.

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