Since there is no intermediary involved, the AMC does not have to pay any commission or trailing fees. A regular plan is bought through an intermediary who helps the investor understand the investment strategy of the fund, fill the forms, etc.
> Can I save money by investing in direct mutual fund plan?
– Gautam Kumar
A direct plan is bought by an investor directly from the mutual fund. Since there is no intermediary involved, the AMC does not have to pay any commission or trailing fees. A regular plan is bought through an intermediary who helps the investor understand the investment strategy of the fund, fill the forms, etc. For this service, the AMC pays commission to the intermediary. This cost reflects a higher expense ratio of the regular plan. If you invest through a bank that is registered as a distributor you are investing in a regular plan (with higher expense ratio) and not a direct plan (with lower expense ratio). If the bank is a Registered Investment Advisor the investment could be in the ‘direct’ plan.
> I am planning to invest in equity mutual funds. Can I lose my principal amount invested if markets fall?
Yes, since they depend on the performance of underlying stocks which may deliver negative returns. But it has been observed that as the holding period increases, the probability of negative returns tend to reduce. The probability of negative returns is the highest for a one-year holding period and over a seven-year holding period, probability of a negative return from Indian equities is negligible. At an individual fund level, this probability might differ based on the fund’s strategy and long term performance track record.
> I have invested in equity fund through SIP for four years. Will I have to pay tax at the time of withdrawal?
—N H Kamath
Budget 2018 introduced long-term capital gains (LTCG) tax at 10% on equities including equity mutual funds above Rs 1 lakh. The cost of holdings would be based on NAV as on January 31, 2018. Short term capital gains tax for units held for less than one year would be payable at 15%.
> Will indexation on debt fund returns reduce my tax outgo?
The cost indexation benefit is available for debt funds held for at least three years. LTCG is calculated based on the difference between redemption value and indexed cost of the holding. LTCG from debt funds is taxed at 20% if indexation benefit is availed and at 10% without indexation. I-T authorities publish the cost inflation index applicable for each financial year.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org