When the Securities and Exchange Board of India removed entry loads from mutual funds in August 2009, Gurgaon-based software professional Akshay Mehta was delighted.
He would not have to fork out the 2.25 per cent charge he was paying everytime he bought a fund through his Netbanking account. However, in July this year, when he was checking his bank account statement while filing his income-tax return, Mehta was shocked to find that his bank had started charging him Rs 400 a year for what was earlier a free facility to buy and sell mutual funds online.
Mehta used to invest about Rs 5,000 a month in different mutual funds before the 2008 meltdown. However, when the markets crashed, he stopped putting in more money and barely invested Rs 10,000 in 2009. A charge of Rs 400 a year (plus service tax) meant that more than 4 per cent of his annual investment in mutual funds went into paying the bank for the facility.
|HIGH CHARGES, LOW RETURNS |
|Facility/Transaction ||Charges (Rs) |
|Mutual fund trading ||300-400 per year |
|Demat account ||300-500 per year |
|Debit of shares ||10-12 per transaction |
Rates are indicative and may vary across banks
There are several such charges that have surfaced over the past 1-2 years. Mutual fund houses have replaced the entry load on most of their schemes with an exit load.
If Mehta sells his funds within a year, he will have to pay a 1 per cent load. For small investors such as Mehta, there is no advantage in going online.
He gains only if he has a bigger wallet size and invests at least Rs 60,000-70,000 a year. If Mehta doesn't want to pay the charges levied by his bank, he can either go to a mutual fund directly or buy through the traditional offline channel.
He should also try and hold his funds for a longer period to avoid the exit load. Incidentally, nearly 22 per cent of investors in equity mutual funds exit before a year.
The online channel is even costlier if you trade stocks in very small quantities. Every time a stock moves out of your demat account, your depository will levy a fixed charge of Rs 10-15. If you sell five shares of a stock at Rs 25 apiece, your actual realisation will be lower due to these fixed charges.
Mercifully, the transaction charges are levied only on the sale of securities, not on purchases. So you can continue to pick up shares in small quantities, but remember to sell them in a big enough lot.