| All about trail commissions | |
| FUND QUERIES | | BS Reporter / Mumbai November 23, 2008, 0:11 IST | |
Somewhere in January 2008, Sebi has declared that individuals who invest directly at the asset management company's (AMC) office will not be charged entry load. But recently there were reports that the Association of Mutual Funds of India (Amfi) has allowed the fund houses to levy a trail commission on direct investments. Please explain what is meant by trail commission and at what rate is it charged?
Sanjeev Talwar
Trail commission or loyalty commission is a fee paid to a distributor by fund on the investment value which remains with the fund. The trailing commission varies between 0.25 per cent to 0.75 per cent per annum for an equity fund. For debt fund, advisers get their commission only in the form of trail commission. Here, trail commission is usually paid every quarter.
Trail commission is paid to the adviser or agent at the time of the first investment. But it is also possible for a direct investor to introduce an advisor for their investment who will be eligible for the trail commission, after making his investment on a no-load basis.
I want to know the difference between various Gold Exchange Traded Funds (ETFs). As I understand, the Net Asset Value (NAV) of these funds reflects the price of 1 gram of gold. Why do the NAVs differ?
Vitthal Kulkarni
There is hardly any difference in the various Gold ETFs available as they are structured alike. All funds hold physical gold. Also, the NAV closely reflects the gold price. The denomination of Quantum Gold ETF is different because each unit reflects the value of half a gram of physical gold. In other funds 1 unit reflects the value of 1 gram of physical gold.
The NAV of Gold ETFs are marginally different for varying operating expenses and cash component. This leads to difference in NAVs and returns.
With the stock markets falling, returns from Equity Linked Savings Scheme (ELSS) have turned negative too. What will be a better investment strategy to save tax between buying ELSS units at lower value or putting the money in bank fixed deposit (FD) for long tenure.
E.J.Fonseca
In the current market downturn, all equity funds including ELSS fund have suffered. For conservative investors who cannot bear any short-term capital loss a 5-year bank FD may be suited as a tax saving investment. However, investors seeking long-term growth and who can withstand the volatility, ELSS can still be attractive. They hold promise for their ability to deliver good return over a long time period. ELSS is the only all equity tax saving investment option available.
How much money does a mutual fund deduct as expenses and what is the proportion that is actually invested in shares. For example, if I invest Rs 1,00,000 in some fund (directly to avoid entry load and assume that there is no exit load) which invests 3 per cent in Tata Power's shares, will Rs 3,000 of mine be invested for Tata Power shares?
Vikranth
Besides entry and exit load, asset management company also charge annual expense which can be a maximum of 2.25 per cent for equity funds. This fee is deducted in the same proportion every day from the NAV. These expenses include various fees such as investment advisory fee to the asset management company (AMC) and operating expense like fee of custodian, registrar and auditors and marketing and distribution expense. Then there are other expenses such as brokerage paid in buying securities.
In your quoted example, if we ignore the entry and exit loads and assume that you make an investment of Rs 1 lakh in a fund. After deducting the expense ratio on annual basis, the rest will be invested in the fund. The exposure of your money in a particular stock will be the same as shown in the fund's portfolio.
Are the units obtained through 'dividend reinvestment' option subjected to exit load? Also, do these units attract any capital gains tax if I redeem all of it before one year? I particularly want to know about equity schemes. For example, I had invested Rs 5,000 in April 2007 in a scheme through dividend reinvestment option. Following this, I got additional units twice, as the fund announced dividends two times. If I redeem my investment at one go, how the capital gains tax will be calculated?
Vigneshkumar S
According to recent guideline given by market regulator Sebi, no entry and exit load will be charged on bonus units allotted and reinvested. If you redeem the entire units (allotted initially and then after by dividend re-investment option) before one year, you are liable to pay short-term capital gain tax on profit amount.
The units allotted from dividend reinvestment option and profit made from these units will also attract a short-term capital gain tax if holding period is less than one year. In equity based funds, short-term capital gain tax is charged at 15 per cent, whereas long-term capital gain is tax-free. I am investing in HDFC Tax Saver fund with dividend reinvestment option through Systematic Investment Plan (SIP). Can I claim tax rebate under section 80C of income tax for amount of dividend reinvested?
Dilip Kasera
Yes you can claim the tax benefit on the reinvested dividend amount in ELSS. This has to be done same financial year in which the dividend is received. ELSS is an equity-based fund and also dividend earned from equity oriented schemes is tax-free. So, if a person claims tax rebate section 80C of Income Tax by investing the dividend in any tax-saving instrument.
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