Loads & Taxes

Jayprakash Chavan wants to know if the expenses incurred by a fund are passed on to the investors


Do mutual fund investors get the benefit of bonus shares, dividends, rights issue etc? Also, when the portfolio is switched by fund manager more often, how is the cost (Brokerage+ Securities Transaction Tax+ Short Term Capital Gains Tax etc) passed on to the investor. Are these expenses met through entry load and exit load?
-Jayprakash Chavan

Ofcourse. All benefits in the form of dividend, bonus share, right issues, interest and gains on all investments accrue to the fund and reflected in the NAV.

Mutual funds have a unique tax status. From the income tax point of view, it is exempt from paying tax on gains accrued due to normal process of business, such as short-term capital gains tax and long-term capital gains tax. The other expenses incurred by the fund can be classified into two broad heads - transactional expenses and operational expenses. All these expenses are charged to the fund and ultimately passed on to the investors.

The transactional expenses include Brokerage, Securities Transaction Tax, etc. Such expenses are incurred on a day-to-day basis on buying and selling of securities and get deducted from the NAV of the fund on a daily basis.

The operational expenses of a fund include management fees, custodian fees, audit fees, etc. These expenses are met through the expense ratio, which are also adjusted on the daily basis from the NAV of the fund. The upper limit for expense ratio differs for different types of funds. It is 2.50 per cent for equity funds, 2.25 per cent for debt funds, 1.5 per cent for index funds and 0.75 per cent for fund of funds.



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