Time your shift to direct plans well

The returns are higher by 30-50 bps. But it makes little sense to shift if you have not stayed invested for a year

At a time when the BSE Sensitive Index, or S&P Sensex, returns 0.69 per cent annually in three years in a row, even an additional 30-50 basis points (bps) sound good, especially over the longer term. In such circumstances, the Securities and Exchange Board of India’s decision to allow retail investors to invest directly into mutual funds for a higher net asset value (low expenses-higher returns) is a good move.

Data from Value Research shows that in the past six months, HDFC Equity (direct) returned 1.36 per cent, whereas the regular plan gave one per cent. Axis Liquid Direct returned 4.53 per cent in six months and Axis Liquid Ret gave 4.23 per cent. The differential between direct and regular plans is a good 30-50 bps.

No wonder, then, that investors have taken to the concept. According to data from the Association of Mutual Funds, Rs 2.11 lakh crore (26 per cent) of assets under management out of the total Rs 8.08 lakh crore in the July-September quarter comes through the direct route.

However, it is not without hiccups. For existing investors, a number of things have to be taken into account before they shift their money. That is, a number of fund houses have recently hiked the exit load to one-three per cent. In addition, there will be a securities transaction tax (STT) of 0.01 per cent (only in case of equities) and also a capital gains tax.

According to Manoj Nagpal of Outlook Asia Capital, the exit load would be applicable to those who had invested in regular plans through a distributor. Others can move to direct plan seamlessly. However, if their investment is less than a year old, they will have to stay invested.

For instance, if you have invested Rs 1 lakh in a debt fund for an expected return of six per cent annualised returns, exiting the plan in the sixth month could cost one per cent exit load or Rs 1,030 (the final return: 101,970). In addition, there will be a short-term capital gains tax. The capital gains of Rs 1,970 will be added to your income and for the highest tax bracket that it means another 30 per cent (Rs 656) of the returns will be wiped out.

Therefore, if it is just to earn an additional 30-50 bps, it does not make much sense to shift. If you have stayed invested for the long-term, one year in case of equities, there will be no capital gains tax or exit load. Shifting would be cheaper because only STT will apply.

In case of some debt schemes such as accrual schemes, one may have to hang around for two years or more to save on exit load. However, there will be capital gains tax of 10 per cent with indexation and 20 per cent without indexation. Take the right call based on these numbers, and then stay invested over a longer period to take advantage of direct plans.