Know your transaction charges

My statement says that a transaction charge of Rs 100 has been deducted from my investment. What is a transaction charge and when does it apply?

In order to enable people with small saving potential and to increase reach of mutual funds in urban areas and smaller towns, the Securities and Exchange Board of India has issued guidelines to funds for deducting transaction charge for a subscription of Rs 10,000 or above.

This charge goes to the distributors of the fund products. The applicability of this charge is explained below.

For investors in a mutual fund, a distributor may be paid Rs 100 as transaction charge for a subscription of Rs 10,000 or above.

As an incentive to attract new investors, a distributor may be paid Rs 150 as transaction charge for a first-time investor.

The terms and conditions relating to transaction charges are mentioned in the scheme information document/key information memorandum.

This charge will be deducted by the asset management company from the subscription amount and paid to the distributor; the balance shall be invested.

Please note that this charge depends on the distributor registering for an ‘opt-in’ or ‘opt-out’ to deduct and receive the transaction charges.

If a distributor has registered with the Association of Mutual Funds in India to opt out, that is, not to receive such a charge, then no charges will be applicable even if you apply through such a distributor.

Such charges will be applicable only if an investor has applied for fund units through a distributor who has opted in to receive such charges. Of course, if you invest directly no charge shall be deducted.

So if I invest Rs 10,000, will Rs 9900 be invested?

Yes. If you are an existing investor, after deducting Rs 100, the balance amount will be invested and units will be allotted for Rs 9,900.

What if I invest less than Rs 10,000?

In that case, no charge will be applicable.

What happens in case of a systematic investment plan (SIP)?

For SIPs, the transaction charge shall be applicable only if the total commitment through SIPs amounts to Rs 10,000 or above. For example, if you commit in the application form to invest in an SIP of Rs 1,000 for 12 months — making that Rs 12,000 in total — the transaction will be levied and recovered in four instalments. This means that the total amount you have committed to the SIP should be Rs 10,000 or more. If you start an SIP for Rs 1,000 for six months, making that a commitment of Rs 6,000, the charge will not be deducted.

How do I indicate whether I am an existing or a new investor?

Application forms will contain a section for declaring that. If you have invested in any mutual fund earlier, you may indicate that you are an existing investor. Only if you are a first-time investor in mutual funds you may indicate the same appropriately on the form and deduction of applicable transaction charges will be effected after necessary verification.

Is there any other charge applicable to my transactions?

Yes, funds may charge an exit load when investors redeem or switch out before a certain period specified by the scheme. This is a percentage of the amount redeemed or switched out. For example, for a certain scheme you may be charged an exit load if you redeem within six months of purchase.

(Contributed by CAMS Viveka, an investor education initiative from CAMS. The views expressed are general practices in the mutual fund industry and may vary according to the case.)

COMMENT NOW