I am 30-year old. I have been investing through SIPs since 2011 with long-term investment (more than five years) objective. I invest in ICICI Focused Bluechip Equity (G)- Rs 2,000, HDFC Top 200 (G)- Rs 5,000, HDFC Prudence (Dividend Reinvestment option)- Rs 2,000, DSPBR Top 100 (G)- Rs 5,000 and IDFC Premier Equity (G)- Rs 2,000.
From 2013 my existing SIPs have been converted to 'Direct plan' of these schemes. I am under dilemma whether I should consider switching the free units to the Direct plan of corresponding scheme now or keep them because I bought the units at relatively low price. Now since market is near 20,000 mark does it make sense to switch to direct plan by buying units at relatively higher cost?
-Gaurav Purandare
It is wise to invest in direct plans as they save on distribution expenses or commissions which are paid out of your money to distributors.
When you say free units, we understand you are referring to the SIPs you made in 2011 and 2012, which are free from Short Term Capital Gains (STCG) Tax.
A switch transaction is a simultaneous redemption and purchase so it entails tax consequences. Investments redeemed before a year attract an STCG of 15 per cent with three per cent cess. The SIPs made before March 2012 would be free of STCG because they have been invested for a year now. While the rest would attract the STCG if you switch.
You were investing directly through the AMC which means your investments will not attract any exit load, but a complete withdrawal of investments that have not completed a year will be charged at 1.5 per cent depending on the fund house.
You should also look into the Securities Transaction Tax (STT). The fund house will deduct STT at 0.001per cent when you redeem your investment.
Also, your question about buying at low price and investing when the markets are high, is invalid because your money has also grown with the market in the form of higher NAV or dividends.
You should consider switching after calculating the STCG on remaining investment and STT on entire amount invested. Also, the difference in gains between direct and regular plan will be substantial only if you remain invested for long-term. If you withdraw your investment in one or two years the difference in gains is not more than 0.5 per cent in most funds.
Or you could also wait for all your SIPs to get free of STCG and make fresh investments in other or same funds.
This article was originally published on March 22, 2013.
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