Cost-effective versus convenient

There are quite a few routes to invest in mutual funds. A comparison...

Until last year, Ram Kumar was investing in a mutual fund through an agent. However, he was recently told that he would be charged a fixed amount of Rs 500 for the services.

Kumar would have agreed to the agent’s demand, but he realised there were other cost-effective options available. Although he has not researched about the other options, he is willing to put in the time.

Besides investing in mutual funds through an independent financial advisor or distributor, the likes of Kumar can invest directly via asset management companies (AMCs), banks and online portals (such as Fund Supermart, iFast Financial). There is yet another option that was launched almost a year before — mutual fund trading platforms — offered by both the Bombay Stock Exchange and the National Stock Exchange. Popularly known as the mutual fund service system or MFSS, it allows you to invest in mutual funds through brokers. Here, an important requirement is a demat account.

On the other hand, approaching an AMC directly will imply spending a few hours in travelling and waiting at the fund house’s office.

Cost If you are transacting through the stock exchange trading platform, you need to pay a transaction charge of about 0.5 per cent and an annual maintenance charge of Rs 500-700 for the demat account.

You do not need to pay an advisory fee, such as in case of distributors and banks. A fee of one-two per cent of investment amount or a flat one of Rs 150-200, is typically charged by distributors and banks. When you approach an AMC directly, you do not pay anything over and above the amount you invest.

Redemption If you want to withdraw from a scheme, the settlement is done on a T+3 basis (transaction day plus three days) on all investment platforms for equity schemes. It means you receive the proceeds three days after redeeming the fund units.  

KNOW BETTER
	Stock exchange platform	Distributors	Fund house
Cost	Transaction fee = 0.5 per cent + Maintenance fee = Rs 500-700	Advisory fee = 1-2 per cent of investment / flat Rs 150-200	Zero
Redemption	T + 3 basis	T + 3 basis	T + 3 basis
SIP	Fewer options	Available	Available
Taxation	STT levied on both investing and redeeming	STT on redemption	STT on redemption

If you apply for redemption before 3 pm on a particular day, you will get the same day’s net asset value (NAV) at the market closing time. If applied after 3 pm, the next day’s closing NAV will be applicable.

Systematic investment plan (SIP) While investing through MFSS, you may not be able to invest in SIP. Only a few fund houses, such as Reliance Mutual Fund, offer the SIP option over the exchange platform. Also, you may not have the option of many schemes on this platform, as AMCs have listed only a few equity schemes on MFSS.

Sudipto Roy, business head, Principal Mutual Fund, says, “We will soon enter the second phase of MFSS and SIP will be made available.”

On the other hand, other channels of investment can get you a whole host of schemes and SIP to choose from.

Taxation Mutual fund investments attract the Securities and Transaction Tax (STT) of 0.25 per cent. It is applicable irrespective of the channel you choose to invest through. But the manner of levying the tax varies with your choice of intermediary.

Say, you invest Rs 1 lakh in a mutual fund scheme and the investment doubles in a year. If invested via a non-exchange channel, STT (Rs 500) will be levied on redemption. But over MFSS, STT is divided into two parts of 0.125 per cent and levied both on investing and redeeming. The total STT payable, here, will be Rs 375 (Rs 125 on the investment amount and Rs 250 on the redemption amount).

Loan against mutual funds A key advantage of investing in funds via exchange platform is that you hold the units in demat form, says Kedar Deshpande, head-retail broking, Edelweiss.

“For pledging demat units, you need to present the pledge slip, which your broker will give you, and it will go to the lender. The lender, too, assured as the depository holding the units, can act as a guarantor for the fund transaction,” adds Deshpande.

However, when you invest through other channels to pledge the units, you first need to register these with the fund house. The fund house will hand over the transaction receipt that is to be given to the lender. The process can be time-consuming and cumbersome. And, it will get magnified if you hold units with different fund houses, adds Deshpande.