Cost of investing in Equities vs Equity Mutual Funds

Cost of investing in Equities vs Equity Mutual Funds

There has always been a debate among investors over the cost of investing in equities vs equity mutual funds. Some believe that investing directly in equities is cheaper and effective, whereas some believe the opposite. While the cost of investing in equities vs equity mutual funds depends upon various factors and either of them can be cheaper depending on those factors.

Now, before we move on to discuss those factors, let us first understand what all costs are involved in investing in equities vs equity mutual funds.

Costs involved in investing in equities

There are several charges that an investor has to bear when buying or selling shares. Some of the most common include Brokerage Charges, Stamp Duty, Securities Transaction Tax and other charges.

Brokerage Charges

This fee is charged by the brokers as a commission for their services. For instance, if your transaction amounted to INR 1,00,000 and your broker charges a commission of 0.3 percent on that transaction, this will amount to a brokerage fee of INR 300. The brokerage charges are variable and depend upon the type of broker you are dealing with. Broadly there are two types - 

  1. Full-Service Brokers – Full-service brokers like Angel Broking provide all-inclusive trading service that includes trading in stocks, currency, and commodities as well as related service of research advisory, management of sales and assets, investment banking, etc. The charges of a full-service broker could range from anywhere between 0.01 percent to 0.50 percent on delivery and Intraday trading.
  2. Discount Brokers - Discount brokers like Zerodha provide investors with execution platform for trading and charge a commission on this. They generally do not offer any other services including investment advisory. Their charges could range from anywhere between a flat fee of INR 10 - 20 per trade to 0.01 percent of overall trade amount on intraday trading and delivery. Also, you might come across some discount brokers who do not charge any sort of fee on delivery trading.

In the usual case, you need to pay a brokerage fee on both sides of the trade which is while buying as well as selling a share. But again, there are some brokers who charge a brokerage fee only on one end of the transaction, that is either on selling or buying.

Securities Transaction tax

The second cost involved is STT. It is a tax which is charged on both sides of the buy and sell transaction. In the case of intraday trading, the STT is around 0.025 percent of the total transaction and is only charged when the stock is sold. In case of delivery, STT charges about 0.1 percent of the total transaction, on each side of trading. 

Stamp Duty

Stamp Duty on Transfer of Shares is the tax which is levied by the government on transfer or exchange of financial securities. It is levied by the Central Government in accordance with The Indian Stamp Act, 1899. It is charged on the total turnover amount on both the buy  and sell sides.

Goods & Service Tax (GST)

GST is 18 percent of the brokerage charge paid by you and is the same for delivery as well as intraday trading.

Transaction Charges

This is a fixed amount charged by the stock exchanges, on both sides of the trading.  The NSE charges  0.00325 percent and BSE charges 0.00275 percent of the total amount and this charge is the same for both intraday and delivery. 

Securities and Exchange Board of India (SEBI) Turnover Charges

The regulator of the securities markets in India charges a fee on both sides of a trading transaction with a turnover charge of about 0.0002 percent of the total amount. The charges are the same for both intraday and delivery trading.

Depository Participant (DP) Charges

The two stock depositories in India, the NSDL AND CDSL charge a fixed sum for keeping your shares in an electronic form. The depositories don’t charge you directly, rather they charge your Demat account company or your broker company, which can also be called as a depository participant (DP). The DP in turn charges you an annual fees.

Also Read: How to Invest in Mutual Funds?

Costs involved with investing in equity mutual funds

The mutual fund company charges a SEBI-approved, but a well-earned fee for their services. This fee includes all the charges and is termed as the expense ratio. Let us discuss all those charges.

One Time Charge

One time charges are those which occur only one time during the entire period of investment. It’s sometimes referred to as transaction charge. Load is an example of a one time charge. 

Load is basically a commission or fee which the AMC or intermediary usually collects before or after you make the investment. There are usually two kinds of Loads on mutual funds.

  1. Entry Load - It is a charge which the investor has to pay when he purchases a fund unit or we can say enters a mutual fund. Not all funds levy this. SEBI has deferred this load in August 2009 for mutual funds alone.
  2. Exit Load - It is a charge which is levied on an investor when he decides to exit from a mutual fund or to redeem his mutual fund units. This can range between 0.25% to 5%, based on the scheme and the respective fund house. The idea behind the exit load is to make people stay invested for a longer period. No such charge is applied if you sell your units after the lock-in period.

Recurring Charge

These are the fees which the investor has to pay on a daily, quarterly or annual basis. It’s basically charged for maintaining the portfolio, advising, marketing and other expenses. It is also referred to as Periodic fees. Few of these recurring charges are-

1. Management Fee

Management fee is an expense charged by the Fund Manager for his services and for managing the funds.

2. Account Fee

Some AMCs charge clients, if they do not meet the minimum balance criteria. They deduct this from the clients portfolio to maintain the account.

 3. Service Fee

It is basically charged by the AMC for providing you all the services including printing, mailing, etc. It provides the fund manager with adequate funds, if the AMC is cutting close corners.

4. Distribution Fee

This is an expense borne by the investor for the marketing, selling and  distribution expenses of the mutual fund. This fee is generally optional and one can avoid it by investing in mutual funds through direct platforms.

 Switch Price

Some funds allow switching between mutual funds wholly or partially, depending upon your scheme. This switching between funds attracts the switch price. Let's say you can switch from Scheme X to Scheme Y at a particular price called Switch Price. 

Securities Transaction tax

STT is a cost of investing in equities and equity mutual funds both.   Under mutual funds, it is charged outside of expense ratio i.e. additionally when you sell the mutual funds units. The STT charge for equity mutual funds is fixed at 0.001% for closed-ended funds or ETF and 0.025% for Open-ended funds.

Conclusion

Now, you know all the major cost of investing in equities and equity mutual funds. Hence, you can yourself observe that their cost depends on various things. While there are some fixed costs which can't be avoided in both the instruments. But there are few costs which you can avoid or reduce.

For eg- Investing through discount brokers will reduce your overall cost of investment. In fact, it will turn out to be cheaper than most of the equity mutual fund schemes. However, one may not get access to additional services, such as research reports or advisory.

On the other hand, index funds which invest in the same stock and in the same proportions as a particular index are the cheapest source of equity mutual funds. Their average expense ratio lies somewhere around 0.15% and might be more cost-effective than investing directly in equities through most of the brokers.

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