Stamp Duty on MF Purchases: Not a Big Deal

Stamp Duty on MF Purchases: Not a Big Deal

From the start of this month, all mutual fund investors have to bear stamp duty at a rate of 0.005 per cent on mutual fund purchases. The duty is irrespective of the amount you have invested and is applicable for every category of investment such as equity, debt and hybrid. Even all current systematic investment plans and systematic transfer plans whose amount will be debited in this month have to pay this duty. Many are considering it as a return of entry load, which was abolished more than 10 years ago. However, I believe the duty is not substantial and will not dent the returns.

For every investment of Rs 1 lakh of investment, you have to pay Rs 5 as stamp duty. This will have a negligible impact on the individual investor. First, on an average, retail investors have asset under management of little northward of Rs 1.5 lakhs. Hence, even if an investor makes an investment of Rs 1.5 lakhs in lump sum, he needs to pay only Rs 7.50. Moreover, in SIP, the much-preferred route of retail investors, the average ticket size is about Rs 5,000 on which you would need to pay around Rs 0.25. Therefore, the imposition of stamp duty should not hurt the sentiment of individual mutual fund investors.

On the contrary, this move will instil discipline among investors as it will restrict them from frequent churning of the portfolio for fear of attracting stamp duty. In terms of the type of plan, it might adversely impact the dividend reinvestment plan as dividend reinvestment will attract stamp duty that will reduce the future returns. This has come after the Union Budget 2019 made dividends fully taxable as per the slab rate.

This move will also hurt the returns of investors holding funds for a shorter duration, especially for liquid funds and overnight funds. The impact is inversely related to the holding period. So if a fund is held for a week it will see a larger impact of stamp duty as compared to a fund held for a month. In this space, however, institutional investors or HNIs are more active and hence will not be impacted as compared to retail investors.

SHASHIKANT

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