The truth behind those ELSS tax benefit schemes

FISHY FUNDS: Fund houses may be increasing investors' expenses by paying distributors extra commission.

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Mumbai: If your mutual fund agent is pushing you to buy an ELSS scheme for tax benefit on investment, that may be least of his concerns.

On the back of good returns and getting more investors, fund houses may be increasing your expenses by paying distributors extra commission upfront. That's the trail fee charge, which is ideally paid over three years.

This is because investors need to remain locked in to an ELSS for three years to avail of the tax benefits.

“It is a widely followed practice and it is true that ELSS money coming into a fund is a very desirable kind of money. Most fund companies would like to attract this kind of money as much as possible because they are getting the money for three years in a guaranteed way,” explains valueresearchonline.com’s CEO, Dhirendra kumar.

Ideally, like any other open-ended scheme, fund houses should pay only the 2.25 per cent entry load as distribution cost.

But a trail fee of 50-75 basis points every year, makes it a 4-6 per cent commission to sell ELSS schemes of three years.

Which means, that if Rs 10,000 are invested in an ELSS, distributors now demand Rs 400-600 upfront rather than waiting for three years to earn it.

Unsurprisingly, it is the investor who bears the expense for this.

“The investor is bearing the load and the expenses and all the money provided by the AMC to the distributor is on account of this only,” says Dhirendra kumar.

“The company will be taking this money in anticipation of the future expense ratio and future management fee, which will be charged to these funds only,” he explained.

To an extent, trail fee may also be funded by fund houses. But as no distributor or fund house wants to comment on record, industry insiders say mobilising money from investors in smaller towns is a costly affair and hence, it is a viable option to be granted an upfront trail.