A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment company in the UK.
What costs are incurred when redeeming mutual fund units?
Open-ended mutual funds allow investors to redeem their units after a certain period at no cost. If an investor wishes to redeem his shares before this stipulated period, an exit charge is collected. Mutual funds charge the exit charge if investors sell their investments before they have completed a specified time in the fund. This is intended to discourage investors with short-term goals from investing in funds that require a long-term holding period. Liquid funds usually do not have an exit load.
Exit loads are charged as a percentage of the NAV if units are redeemed before a certain time as mentioned in the scheme information document. Let’s say a scheme has an exit load of 1% if the investment is redeemed before a year. If the NAV of the scheme is INR 100 and you redeem your stake before one year, you will only receive INR 99 per unit of your participation as 1% will be deducted from the fund house for premature redemption.
You will also incur a capital gains tax depending on the type of investments you have made and how long you have held the investment, such as short-term or long-term capital gains tax. Capital-oriented fun transactions are also subject to STT (Securities Transaction Tax). Every time you buy or sell units from these funds, you pay STT which adds to the cost of your transaction.
