# Expense ratio of direct plans 60 bps lower than regular schemes

Posted online: Tuesday, May 20, 2014 at 0000 hrs
How does indexation work in debt mutual funds? How is it calculated?

 Rishab Mehta

In simple terms, indexation is a technique to adjust income payments by means of a price index, to account for inflation. Indexation is calculated by using a Cost Inflation Index, which the I-T department comes out with every year.

Lets assume you invested R10,000 in a debt fund in FY12 and redeemed it in FY14 at R12,500. If the cost inflation index for 2011-12 is 785 and for 2013-14 is 939, the cost of your debt fund for calculation of long-term capital gains would be 10,000 X 939/785 = 11,961. Thus your long-term capital gains would be (12,500-11,961 = 539).

I got some dividends from debt funds last financial year. Do I have to pay dividend distribution tax after maturity of the fund?

 Pankaj Singh

The dividend distribution tax is paid by the asset management company while paying out dividends to investors. There is no DDT to be paid by the investor after maturity of the fund. There could, however, be incidence of short term/long-term capital gains tax, which might have to be paid out depending on the type of gains made by the investor.

How much can I save by investing directly in a fund over 10 years?

 Gaurav Bhatia

Direct plans of funds have expense ratios that are lower by 30-60 bps than regular plans, which is what you save by investing directly in a fund. I would, however, word this question slightly differently  how much extra would I earn by investing directly in a fund over a period of 10 years?

Assume that you invest R1 lakh in an equity fund through a distributor, which gives you 15% CAGR returns over a 10-year period. At the end of 10 years, you would end up with a portfolio value of R4.04 lakh.

If you invest through a direct plan that charges 0.5% lower expenses, the fund would end up delivering 15.5% CAGR return. You will earn R4.22 lakh after 10 years. Thus you have earned R18,000 additional over 10 years, assuming the amount invested and returns mentioned.

How would I know about returns in systematic investment plans and compare it with other funds?

 Achal Sood

There are tools like SIP calculators, which are available on sites like www.morningstar.in, which would help in calculating and comparing these returns.

I have been continuing an ELSS for the past five years. Can I redeem the units now?

 Sukumar Rao

ELSS schemes have a lock-in of three years and you can redeem the units of the scheme now.

How cost-effective are index funds? Are they the easiest way to track

a fund?

 Yatish Bhandari

There are two ways in which an investor can track the index efficiently  one, by investing through an index fund and, two, by investing through an exchange-traded fund (ETF). In terms of expenses, index funds or ETFs have average expenses of around 1% or lower. This compares to 2-2.5% expenses typically charged by an actively managed fund.

Buying ETFs, however, requires you to have a brokerage account and you need to pay brokerage while buying and selling the units. The advantage in ETFs is that the price of the ETF varies intraday based on the price movement of the index while you can buy or sell mutual fund units only at the end of the day price.

Niranjan Risbood

The writer is director, Fund Research, Morningstar India