Switching from regular to direct plans is currently treated as a redemption, and hence the proceeds would be subject to tax.
Investors should ideally stick to their strategic asset-allocation which in turn depends on their risk appetite.
I have invested for 8-10 years in regular mutual fund schemes. I now want to shift to direct plan. Should I move the money accumulated in regular plans? Will it mean long-term capital gains tax? —Gaurav Batra
Switching from regular to direct plans is currently treated as a redemption, and hence the proceeds would be subject to tax. However, the reinvestment would also reset the cost of the funds to the prevailing net asset value (NAV) at re-entering the fund, and hence the capital gains at the end of your investment horizon would accordingly be lower, leading to a lower tax outgo at the end of your investment horizon. The only loss you could face is loss due to exit loads (if any), stamp duty charge on entry (0.005%), and subsequent gains which you could have made on the tax outgo till the end of your investment horizon.
The additional expense levied in case on regular plans is charged to the overall investment corpus and hence the impact over long investment horizons would be sizeable. Hence, moving to direct plans certainly makes sense. Considering the fact that you have been investing for 8-10 years, the bulk of your investments under regular plans are likely to be subject to the more favourable long-term capital gains taxation. Hence, you may start with moving this bulk of the regular plan allocation to direct plans, and subsequently invest the remainder of the corpus over the next year.
Given the prevailing rich equity market valuations, you can look to stagger the equity portion of your investments over the next few months. However, this can subject you to the risk of underexposure if markets rally further. As the accumulated corpus till date may be substantial, it is advisable to stick close to your long-term strategic asset allocation and allocate a bulk of the equity corpus right at the outset. You can look to stagger a smaller portion of the equity corpus over the next few months.
Switching between options within the same scheme is just a change in accounting, and hence there would be no break in your exposure. You should evaluate the performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently over the last two-three years, you may switch to a more consistent one.
The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to firstname.lastname@example.org