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.
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:
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.
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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.
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.
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%.
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.
There are two stock depositories in India:
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.
Capital gains tax is applied to the profit made from the sale of stocks, depending on the holding period.
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:
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.
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.
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.
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.
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.
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.
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.
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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