Mutual funds have been extremely popular among investors in the country who might not have the time to manage their own portfolio but want to plan towards their goals. However, as of July 1, 2020 a stamp duty has been imposed on the purchase of all categories of funds including Exchange Traded Funds. In this article, we will have a look at how this may affect you, if you plan on investing in mutual funds.

How much does the stamp duty amount to?

As per SEBI, a stamp duty of 0.005% will be levied on the value of total units purchased in mutual funds. Apart from this, the transfer of units between demat accounts will also attract a duty of 0.015%. You don’t have to worry about extra processes as the duty will be auto-deducted on purchase.

Where are such charges applicable?

Stamp duty on purchases will be applicable in the following cases,

1. All new lump-sum purchases in equity and debt funds.
2. Systematic investment plan (SIP) and systematic transfer plan (STP) undertaken for any mutual fund scheme. In the event of previously existing plans, the duty will be charged on the fresh monthly purchases.
3. In the event of dividend reinvestment transactions.
4. While switching from one scheme to another and while transferring units between demat accounts.

How does impact decisions to invest in mutual funds?

At the face of it, the amount you will have to spend on purchasing a particular number of units in a mutual fund will increase; however, this is a very small increase, ie. 0.005%. This charge may be a small deterrent for short term investors, who sell their units within 90 days of purchase. Beyond this point, there is hardly any setback to your purchase, regardless of how much you choose to invest. Let us take for example that you choose to invest INR 1 lakh in a fund of your choice. Then the stamp duty that you incur on this purchase will only amount to INR 5. Since most of us use mutual funds to plan for goals in the medium to long term, this is almost negligible in the larger scheme of things. 

What are the other charges to keep in mind regarding mutual funds?

The stamp duty is a new inclusion to the list of charges you incur while investing in mutual funds. Here are the others that you should remember,

1. Expense ratio: Expense ratio is the annual fee charged by your asset management company (AMC) for managing your contributions. It is denoted as a percentage of your investment.
2. Service fee: Transaction or service fee is the amount associated with processing your purchase or sale of mutual fund units. 
3. Exit load: Exit load is a charge that is primarily levied to discourage investors from prematurely withdrawing their investment.

The exact value of these fees varies from one company to another, so don’t forget to enquire about them before you start investing. 

When it comes to investing in mutual funds, the newly announced stamp duty is an extremely small charge that can be overlooked if you’re planning to make long term capital gains. This shouldn’t discourage you from investing in mutual funds to achieve your goals.