I’ve invested for 8-10 years in common mutual fund schemes. I now wish to shift to direct plan. Ought to I transfer the cash accrued in common plans? Will it imply long-term capital good points tax?
—Gaurav Batra
Switching from common to direct plans is presently handled as a redemption, and therefore the proceeds could be topic to tax. Nonetheless, the reinvestment would additionally reset the price of the funds to the prevailing web asset worth (NAV) at re-entering the fund, and therefore the capital good points on the finish of your funding horizon would accordingly be decrease, resulting in a decrease tax outgo on the finish of your funding horizon. The one loss you could possibly face is loss as a result of exit hundreds (if any), stamp obligation cost on entry (0.005%), and subsequent good points which you could possibly have made on the tax outgo until the tip of your funding horizon.

The extra expense levied in case on common plans is charged to the general funding corpus and therefore the impression over lengthy funding horizons could be sizeable. Therefore, shifting to direct plans definitely is smart. Contemplating the truth that you will have been investing for 8-10 years, the majority of your investments below common plans are more likely to be topic to the extra beneficial long-term capital good points taxation. Therefore, chances are you’ll begin with shifting this bulk of the common plan allocation to direct plans, and subsequently make investments the rest of the corpus over the following yr.

Given the prevailing wealthy fairness market valuations, you’ll be able to look to stagger the fairness portion of your investments over the following few months. Nonetheless, this could topic you to the chance of underexposure if markets rally additional. Because the accrued corpus until date could also be substantial, it’s advisable to stay near your long-term strategic asset allocation and allocate a bulk of the fairness corpus proper on the outset. You possibly can look to stagger a smaller portion of the fairness corpus over the following few months.

Switching between choices inside the identical scheme is only a change in accounting, and therefore there could be no break in your publicity. It is best to consider the efficiency of the funds in your portfolio vis-à-vis that of their respective class friends. If a fund has been delivering below-average efficiency persistently during the last two-three years, chances are you’ll change to a extra constant one.

The author is director, Funding Advisory, Morningstar Funding Adviser (India). Ship your queries to fepersonalfinance@expressindia.com