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Direct investments in funds

Read on to know about the benefits of switching to direct plan in funds...

My distributor charges 0.55 per cent every quarter for his services. This amounts to 2.2 per cent every year. If I invest Directly, I will save this and the 0.5 per cent in expense ratio. Is my understanding correct?
Does one need to redeem the units in the Distributor account and then re-invest in Direct plan or can the AMC transfer the units to direct plan?
Isn't the expense ratio of 2.7 per cent (2.13 for direct plan) of FT India Dynamic PE Ratio fund quite high for a retiree's portfolio.
- Venkat Tata

It is a wise decision to invest directly through the AMC. Investments in direct plan will save 2.7 per cent of additional expenses in your case. Switching from existing plan to direct one is a simultaneous redemption and purchase. It will not happen automatically and you need to contact the AMC for this.

It is important to know that switching will entail tax consequences. You need to look into the exit load, capital gains tax and STT (in equity funds) that will be charged on your investment. Exit load applicable to you will be same as what was available to you at the time of making the investment. If you are switching ,which amounts to redeeming, before 12 months your investment will attract Short-term Capital Gains tax. If your money has been invested for more than a year it will attract Long-term Capital Gains tax.

Regarding the expense ratio of FT India Dynamic PE Ratio fund, it is high because it is a fund of fund. The fund invests in Franklin India Bluechip fund and Templeton India Income Fund. A feeder fund usually charges 0.75 per cent as its own expense ratio and the rest goes to the parent funds.

Besides being expensive the fund is also not very tax efficient. Due to its 'fund of funds' structure, this fund attracts Short-term Capital Gains tax at the income-tax rate and Long-term Tax at ten per cent without indexation and 20 per cent with indexation, including three per cent cess.

However, this is mostly made up by the fund's benefits. The fund has a unique strategy following which it invests in equity and debt depending on market levels. It invests in stocks when Nifty is low and in debt when the index peaks at dangerously high levels. The fund has delivered good returns with low risk, therefore the expenses should not upset you if you are a long-term investor.



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