If the proposed LTCG regime takes off, investors will be bound to pay 10.4% tax over Rs. 1 lakh capital gains and if you still want to get the same return despite having to pay LTCG tax. Here is a suitable recourse as the direct plan of mutual funds as against the regular plans.

What are Direct mutual fund plans?

As everything else being the same, direct vs regular plans differ only on the cost aspect, as through the direct route, investors are able to ward off the commission paid to the mutual agents. Hence as a result cost is less which actually moves up the NAV by the same proportion.

The difference between the TER or total expense ratio in case of regular and direct plans is between 0.5-0.75%.

Will it be then wise to switch from regular plans to direct plans?

In order to achieve your targeted financial value, direct plan shall really come in handy even after accounting for the LTCG gains tax and expense ratio but what needs to be remembered here is that choice of the fund is all the more important with proper judgement on it.

Also, another important consideration here is that switching from a regular plan to a direct plan for whatever reason attracts taxation liability as the same is deemed to be redemption of units.

So, depending on the holding period there can be a STCG liability together with exit charges if any from the mutual fund scheme.

Conclusion

Regardless of the investor type, direct route of mutual fund will enable the person to save higher over a period of time in comparison to regular funds and hence the targeted financial value can be reached with an overshot of it in some case.

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