Q1. My husband and I started SIPs in 10 different Mutual fund schemes 2 years ago. As we didn’t have much knowledge about it then, we consulted a CA and went with his recommendations. All these are regular MFs and the portfolio is worth ₹ 30L now. After some research, I figured we could have saved the commission fees with direct MF. Will it be a good idea to switch from the existing MF to direct plans right now?
-Ashwini Mehta, Pune
First of all, congratulations on spotting the difference and heading in the right direction.
Regular Plans pay commissions to the broker or the distributor whereas direct plans do not have any commission expenses. This expense ratio can eat up a significant portion of your overall investment. Here’s how:
We did the portfolio value calculations for just a ₹1 lakh investment in a Direct Plan and a Regular Plan over 40 yrs.
We assumed a 12% return on investments and a total Expenses Ratio of 1.0% for Direct Plans and 2.5% for Regular Plans. And the compounding impact made the difference strikingly clear - the direct fund portfolio was worth 35% more in just 20 years.
So yes, the 1.5% commission you save every year can add up to quite a bit in the long run. Now, let’s see how the switch happens.
A switch from a regular plan to a direct plan means two things: selling units of the regular plan scheme and buying units of the direct plan scheme for the same amount.
Since your portfolio is only 2 years old, we are assuming you have a mix of young and old funds. Here’s how you can expect your funds to respond to this transition and make an informed decision.
Short-Term Capital Gains Taxes
You will incur STCG tax on equity fund units less than a year old. STCG is calculated as 15% for gains in equity funds. If your investment is in loss then STCG won’t be applicable.
Long-Term Capital Gains Taxes
You will incur LTCG on units held for more than 1 year for equity funds and 3 years for debt funds. LTCG is calculated as 10% of the gains for equity funds with an exemption on the first ₹1 lakh of gains. If your investment is in loss then LTCG is not an issue.
Exit Load
Exit load varies from scheme to scheme. Most schemes do not charge exit load after 1 year of holding the units.
Lock-in period
This applies mostly to ELSS schemes. If your ELSS units are within the 3-year lock-in, then the switch in such schemes is not allowed. Switch orders placed in units under the lock-in period will fail.
Now that you know, which funds to switch or wait out, here’s how the switch happens:
The fund house nets the proceeds of selling scheme A to buy Scheme B without involving your bank. But this only ensures the switch of your existing regular plan units to direct plan units. To continue your SIPs (under the direct funds), you will need to stop the SIP with your regular plan provider and start a SIP in the direct plan from a direct plan platform.
Q2. Are liquid funds safe? I’m a 26 yo bachelor who is constantly on the move. I can’t trust myself to not splurge my savings and am not very keen on FDs.
-Rishabh Mehta, Bangalore
Liquid funds are a type of debt fund that invests in fixed income instruments like government securities, treasury, etc. They offer safety, better returns than savings accounts, and more importantly full flexibility of redemption. Here’s how:
1. The average maturity of the fund portfolio is no longer than 91 days, hence they take the least amount of risk.
2. Liquid funds do not carry institutional risk. For example, with liquid funds, you don’t have to worry about unforeseen consequences like your bank going under.
3. Historically, liquid funds have provided better returns (more than 4.5% in the last 3 years) which is way higher than the interest regular savings bank account offers (3% or less)
4. Liquid funds are ideal for investing surplus cash over a short duration, say up to three months.
5. Instant redemption offered by some liquid funds can really come in handy in cases such as yours.
So to answer your question — yes, they are safe. In fact, Liquid funds are widely considered to be an ideal investment avenue for an emergency fund.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
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