Investments help you multiply your wealth, but when picking one it’s important to know where every rupee that you’re paying goes. This will help you evaluate your net returns, do a quick cost-benefit analysis or simply ensure that you’re not paying any more than you’re required to as per the latest guidelines.
For instance, the Securities and Exchange Board of India (SEBI), revised rates on mutual funds in September 2018. By lowering the total expense ratio (TER) for equity mutual funds, SEBI aims to make it more affordable for you to invest and aims to protect your interests more comprehensively.
So, if you have always struggled with making sense of investment charges, here’s a quick rundown of all you need to know.
To ease yourself into the process, start with simpler investments such as Public Provident Fund (PPF) and National Pension Scheme (NPS) that levy minimal charges. Here are the key fees associated with the two investment instruments.
Public Provident Fund (PPF)
Penalty charge: If you don’t deposit a minimum of Rs.500 towards this investment per year, you have to pay a penalty. For every year you miss, you have to shell out Rs.50.
National Pension Scheme (NPS)
Investment management fee: Compared to other investments such as equity, for example, the amount you have to pay towards NPS fund management is extremely low, amounting to just 0.01%. This goes to the pension fund managers who are looking after your NPS investment.
Registration fee: To register your NPS investment you have to pay a sum of Rs.200.
Processing fee: To process each transaction, you are liable to pay 0.25% of your contribution as a charge.
When you invest in market-linked securities, the charges involved are more in number and slightly more detailed as well. Here’s a look at the ones you’re most likely to encounter.
One-time charge: Also known as a transaction charge, this is a registration fee of sorts. You have to pay it when you start investing in mutual funds.
Exit load: When you redeem units of your mutual fund, you have to pay an exit load or an exit fee. This varies from scheme to scheme and is applicable when you exit before the lock-in period is up. Thereafter, there is no exit load that you have to bear.
Recurring charge: Recurring charge or periodic fee is payable by you at regular intervals—every day, quarter or year. This amount goes towards maintaining your investment portfolio and other expenses such as advising.
Management fee: This is in lieu of the fund manager’s advice, experience and recommendations with regards to your investment.
Switch price: If you want to transfer your investment from one mutual fund to another, several fund houses give you the option to make the switch. The cost involved in doing so is called switch price.
Total expense ratio: While you know that SEBI slashed the TER earlier this year, here’s what this means for you. For starters, TER is the total amount that is involved in managing your funds including operational, administrative and management expenses. It is calculated by dividing the total fund costs by the fund’s net asset value. So, if you’re investing Rs.10,000, and the TER is 10%, you will pay Rs.1,000 towards TER. Hence this is important to factor in when calculating your net returns as it ensures that you’re not taking an inflated value into account.
As per SEBI’s latest guidelines, fund houses with equity assets up to Rs.500 crore can charge 2.25% as TER annually, those with assets up to Rs.750 crore can charge 2% and those with assets between Rs.750 crore and Rs.2,000 crore can charge up to 1.75%.
Brokerage charges: If you have hired the services of a broker to invest in equity this charge will be the fee you pay in return. It is typically a percentage of the total transaction amount.
Transaction charges: This is a miniscule charge levied by the NSE and BSE on the transaction amount. The former charges 0.00325% while the latter charges 0.00275%.
SEBI turnover charges: As a market regulator, SEBI levies a charge per transaction as well. This amounts to around 0.0002% of the total amount.
Depository Participant Charges: To facilitate electronic transactions, the Central Depository Services Limited and the National Securities Depository Limited levy this charge. However, you pay these charges indirectly. The depository levies this charge on to your demat account provider or broker firm, who in turn passes the charge on to you.
Unit-Linked Insurance Plans (ULIPs)
Premium Allocation Charge: This goes towards the initial ULIP investment, renewal charges and commission of the intermediary. It is levied on an annual basis, is higher during the initial years of the policy and is a fixed percentage of the premium you pay. So, if your premium is Rs. 10,000, and the PAC is 10% (Rs.1,000), the balance amount of Rs. 9,000 will be allocated to funds.
Fund Management Charge: As the name suggests, it is a charge you have to pay to your insurer in exchange for managing your investment amount. This is charged on a daily basis and is capped at 1.35% annually.
Partial Withdrawal Charge: When you invest in ULIPs you can partially withdraw funds. This is charged on a per-withdrawal basis after the number of pre-determined free withdrawals are up.
Mortality Charges: This is typically higher if you are older and is levied on a monthly basis. It is deducted from your fund value and is calculated through this formula: age x sum at risk/1,000 x 1/12. Here the ‘sum at risk’ is the amount that the insurer will pay your nominee in the event of your death.
Fund Switching Charge: When you move between funds, or switch from to another, you have to pay a fund switching charge. You may be eligible for a fixed number of free switches per year. If not, you will have to pay this charge each time you wish to switch.
So, the next time you invest, don’t skip checking the charges! With this handy guide you’ll know exactly where every penny of your hard-earned money is going.
The writer is CEO, BankBazaar.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.