All you Need to Know about Stamp Duty on Mutual
Fund Investments
There are different costs associated with mutual
fund investment. Expense ratio is the annual fee that fund houses charge from
its investors. Till this July, there was no fee for investing or buying mutual
fund units. The mutual fund regulator had implemented a ‘no entry load’ rule on
mutual fund way back in 2009. However, fast forward to 2020 and entry load has
taken a new avatar as stamp duty.
As per SEBI’s directives, all your mutual fund
investments, irrespective of the category of mutual fund and investment route,
will attract stamp duty. However, the stamp duty is negligible, and it will
notmake any significant impact on your mutual fund returns in the long-run.
In this article, we will explain all that you need
to know about stamp duty and its impact on your mutual fund investments.
What is Stamp Duty?
Stamp duty is the charge that is applied to all
mutual fund investments. Stamp duty came into effect from July. To put it
simply, stamp duty is akin to the earlier entry load, as mutual fund investors
have to pay stamp duty for every new investment.
So, whether you are investing in mutual funds
through SIP, lump sum, transferring units from fund to another through
Systematic Transfer Plan, your investments will attract stamp duty. It will
also apply on all types of mutual fund schemes: equity mutual funds, debt
mutual fund and hybrid mutual fund.
Fund houses will levy the stamp duty while
purchasing of units, while redemption/ withdrawing funds from your earlier
investments will not attract any stamp duty.
Stamp duty charge
As mentioned earlier, the stamp duty is
insignificant. The rate of the stamp duty is 0.005% and the amount of stamp
duty will depend on your investment amount. So, the stamp duty of 0.005%
translates into Rs.5 for every investment of Rs.1 lakh.
Let us assume that you are making a lump sum
investment of Rs.1 lakh. Prior to July, fund houses allotted units based on your
investment amount. Depending on the current market scenario, they would allot a
specific number of units. This means they invested the entire Rs.1 lakh in the
market.
But the introduction of stamp duty has changed this
process. Fund houses will now allot units worth of Rs. 99,995 after deducting
the stamp duty of Rs.5. Therefore, you will get fewer units than earlier.
What should I do?
The registrar and transfer agent(R&T) of your
mutual fund house will automatically debit the required stamp duty from your
investment amount. You need not pay for the stamp duty separately. As the
investment process remains same, you can continue with your SIPs and other
investments as before.
As the stamp duty is negligible, you need not worry
about stamp duty making any significant dent in your investments. With the
increase in the holding period, the impact of your stamp duty will decrease.
Mutual fund investments have the potential to
outperform other traditional saving options. Hence, even if we include the
various costs associated with mutual fund investment, you would be better off
by investing in equity mutual funds to fulfil your long-term financial
goals.
Things to keep in mind
- The stamp duty will apply on every SIP
instalment
- Check for overlap in your portfolio. If you
have invested in two or more funds of the same category,look for overlap
in their portfolio, i.e. investments in the same underlying securities.
Funds with higher overlap will cost you more, as you are buying the same
stocks or securities.
- Look to invest in high-quality funds as per
your investment horizon and risk-taking capacity that you can hold for the
long term. A higher frequency of shuffling between funds may mean higher
costs and affect the overall portfolio returns.
Conclusion:
Individual investors like you and me do not have to
worry about the insignificant stamp duty of 0.005%. The cost associated with
mutual fund investments will keep on changing. Planning and focusing on your
financial goals is the best way to invest in mutual funds.
Consult me to know more.
This blog is purely for educational purpose and not
to be treated as an personal advice. Mutual fund investments are subject to
market risks, Read all scheme related documents carefully
#niveshsimplified #fundvaliz #mutualfundsahihai #investment