The talk about direct plans

He asked few questions to his wife on these plans — knowing that she loves to read financial dailies over her morning cup of tea. Obviously she was quite uncomfortable in answering his queries. Jaya directed Rohit’s questions to me.

Rohit shoots his first question on direct plans, “I have made some investments partially through distributor and partially without a distributor. Can I convert my entire investments to direct plan?”

Yes, this can be done by submitting a switch request, was my reply.

“Will NAV of direct plan be different from the NAV for the existing/regular plan?”

On the effective date i.e. January 1, 2013 when the direct plan was introduced, the NAV was same for both existing/regular plan and the direct plan.

Thereafter, there will be difference in NAV based on the expense ratio which will reduce as distributor’s commission and distribution expenses are done away with.

Rohit came back, “Will my future dividend investments take place automatically in the direct plan for those investments which are not routed through any distributor.

My reply was, “In this case dividend investment will take place automatically in the existing/regular plan even though the investment is not routed through the distributor. “

Now, he wanted to know if he could convert his future installments of SIP to direct plan. Yes he could. He can give a request for the conversion to direct plan.

However, the terms and conditions that prevailed at the time of original registration will continue for the future SIP instalments.

Rohit paused. It looked like he had got all his answers. It was a breather for me.

“Our conversation on this is not over till you tell me if the value of my investments will attract capital gains if I go for redemption or switch out,” he started. “But if I am going for conversion from regular plan to direct plan, will my conversion be treated on par with redemption and switch out and capital gains be charged at the time of conversion?”

Now, I was clean bowled. So I connected him with our CFO, Mr. Balwant Jain who was kind enough to address this issue even on a Saturday evening.

According to Mr. Jain, it will entail tax consequences. He added, “As per the provisions of income tax act tax is payable on profit made on transfer of any capital asset. As per the definition, any exchange is also treated as transfer so the exchange of regular plan with any direct plan will amount to transfer and thus depending on cost and holding period, you will have to pay short-term capital gain @15.45 per cent on the difference between your cost and the value realised on such shifting, if the holding period is less than 12 months. If the holding period is more, the appreciation in your investment will be exempt from tax on exchange.”

But the question is whether investors like Rohit will actually be able to do it themselves. Is this so simple?

There were few more questions Rohit wanted to ask. But I requested, “Let’s keep them for another session.”