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HDFC MF Investor: Should I Switch from Regular to Direct Fund?

Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Aug 07, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Asked by Anonymous - Aug 05, 2024Hindi
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I have a hdfc mf for around 4 years and accumulated net 2 lakh but it is in regular fund.. but now i know about direct funds.. so what should i do? 1. Should i switch all units in a direct fund? but will it hamper my compounding i think it would..? 2. or i was thinking that I'll stop new investments in that regular fund and open same direct fund mf and let the net 2 lakh amount stay in regular fund. what should i do?

Ans: Regular funds have higher expense ratios.
But they come with expert advice from distributors.
Direct funds have lower costs but no guidance.

Benefits of Regular Funds

You get professional advice from your distributor.
They help you choose right funds for your goals.
They assist in paperwork and investment process.

Disadvantages of Direct Funds

You have to research and select funds yourself.
No one to guide you during market ups and downs.
You might miss out on better investment opportunities.

Option 1: Switching to Direct Fund

Switching all units to direct fund may have tax implications.
It could disrupt your current investment strategy.
You'll lose the guidance you've been getting.

Option 2: Keep Regular, Start New Direct

This option lets you continue benefiting from expert advice.
Your existing investment keeps growing without interruption.
But you'll still pay higher expenses on existing investment.

Recommended Approach

Consider staying with your regular fund investment.
The advice you get can be more valuable than cost savings.
A good advisor can help you earn more than the extra cost.

Value of Professional Advice

An advisor can help you avoid costly investment mistakes.
They can guide you in rebalancing your portfolio.
Their expertise can be crucial during market volatility.

Long-term Benefits

Good advice can lead to better long-term returns.
This can outweigh the slightly higher costs of regular funds.
Professional guidance helps in achieving your financial goals.

Finally

Staying with regular funds through an MFD can be beneficial.
The expertise you receive can be worth the extra cost.
Consider talking to a Certified Financial Planner for personalized advice.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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I have ~40L in my portfolio and all my MF`s are Regular funds since I have been investing thru ICICIDirect. Now I want to start investing into Direct funds since I realize that Direct funds have lower Expense ratio. So I want to invest thru MFcentral or Zeroda. Now, my quesiton is: Is it a good idea to cancel my existing MF`s (not redeeming) in ICICIDirect and start new direct SIP`s ? Will I be loosing compounding effect of my existing regular MF`s? I dont want to redeem the SIP`s since it will incurr large LTCG taxes
Ans: It may seem tempting to switch to Direct Funds for the lower expense ratio, but there are key factors to consider before making the switch.

Here are a few points in favor of continuing with Regular Funds through a Certified Financial Planner (CFP) or a professional Mutual Fund Distributor (MFD):

Value of Professional Advice
A professional MFD or CFP adds value by offering timely advice, portfolio reviews, and strategic changes based on market conditions and your financial goals. They help you stay focused on long-term plans and avoid emotional decisions.

Platforms like MF Central or Zerodha do not offer personalized advice. You’re left managing the complexities of your portfolio alone, which can be overwhelming and risky, especially during volatile markets.

Disadvantages of Direct Platforms
MF Central and Zerodha are DIY (Do-It-Yourself) platforms. While the lower expense ratio seems appealing, managing the portfolio on your own requires time, expertise, and market insight. Any wrong move could cost you more than you save in expense ratio.

MF Central is not user-friendly and does not offer real-time support for managing SIPs, rebalancing, or tracking your overall portfolio’s health.

Zerodha is a trading platform, but it doesn’t come with personalized advice. It lacks the long-term relationship benefits that an MFD or CFP provides, including goal-based planning and tax-efficient strategies.

Compounding Effect & Tax Implications
Cancelling your existing SIPs and switching to direct funds will not directly affect the compounding of your current investments. However, starting new SIPs in Direct Plans could lead to a disjointed investment strategy. You may also lose out on expert guidance that helps optimize the compounding effect through proper fund selection and market timing.

Switching to direct funds might seem cost-effective in the short run but could result in higher LTCG (Long Term Capital Gains) taxes if you later decide to rebalance your portfolio on your own without professional help.

Avoid Disruption
Switching platforms might disrupt your current portfolio management process like consolidated reports and capital gains tracking, which helps during tax filings. On DIY platforms, you will have to manage all of this yourself.

If you are not satisfied with ICICIDirect's services, you can always switch to another professional MFD or Certified Financial Planner (CFP). A good MFD will still provide the benefits of seamless portfolio management, including consolidated reports, capital gains tracking, and regular reviews, which are critical during tax filings and for keeping your investments aligned with your goals.

Final Thought
Instead of switching to direct plans, continue with Regular Plans through a professional MFD or CFP. The personalized advice you receive will often outweigh the slight difference in expense ratio. Regular reviews, goal setting, and rebalancing help ensure your portfolio remains aligned with your long-term objectives.

Making hasty decisions based on expense ratio alone can lead to missed opportunities and higher risks in the long run.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 07, 2024

Money
I have invested in regular Mutual fund they are HDFC MID CAP OPPORTUNITY FUND Regular Growth Invested-2.91L Portfolio-11.36L XIRR-22%, Franklin India smaller companies Investment-2.15L,Portfolio-8.15L,XIRR-21%,Aditya Birla Sunlife frontline Equity Fund Investment-2.15, Portfolio-5.76L,XIRR-15%,Mira Asset Large & mid Cap Investment-1.31L Portfolio-3.73L,XIRR-21% & ICIC PRUDENTIAL ELSS Tax saver fund Investment-1.50L, Portfolio-4.24L,XIRR-15%. I have stoped all above investment. After understanding mutual fund I have started my own and getting XIRR-24% in Mirea Asset ELSS& 30%,Axis Small cap. Pls suggest may I switch to direct and what is better way to grow my regular Mutual funds.
Ans: You've made significant strides in your investment journey, achieving good returns. Your investments in regular mutual funds have delivered an XIRR between 15% to 22%, which is commendable. This indicates that your fund selection strategy has worked well.

The XIRR of 22% in HDFC Mid Cap and 21% in Franklin Smaller Companies shows a strong performance in mid and small-cap funds.

Aditya Birla Sunlife Frontline Equity and ICICI Prudential ELSS are more conservative, delivering around 15% returns, which are still decent, given the nature of large-cap and tax-saving funds.

The Mirae Asset Large & Mid Cap fund is balanced and performing well, with an XIRR of 21%.

Shifting from regular funds to direct funds is a natural thought, especially when you see higher returns in some of your self-selected investments. Let’s discuss this in detail.

Regular vs Direct Funds: Advantages of Staying in Regular Funds
It’s tempting to switch to direct mutual funds as they offer lower expense ratios, which can lead to slightly higher returns. However, you must weigh the pros and cons carefully.

Benefits of Regular Funds
Professional Guidance: Regular funds come with the support of an MFD (Mutual Fund Distributor) with CFP credentials. This ensures professional management of your portfolio, aligning your investments with long-term goals like retirement, education, or other life events.

Rebalancing Advice: A certified financial planner can provide valuable input on rebalancing your portfolio. They help ensure you don't get overexposed to high-risk sectors or underperforming funds.

Tax Efficiency: CFPs can offer advice on the tax implications of redeeming your funds, ensuring you don’t end up paying unnecessary taxes.

Behavioral Support: It is easy to get swayed by market volatility or make emotional decisions. With a CFP, you get disciplined investing and objective advice to prevent such pitfalls.

Drawbacks of Direct Funds
Self-Management: You must monitor and manage your investments yourself. This requires constant attention to market trends and portfolio performance.

Tax Complications: Managing tax efficiency and understanding the implications of every redemption becomes your responsibility.

Time-Consuming: If you are handling everything yourself, you may need to spend hours tracking the market and researching funds, which might be difficult considering your work or personal commitments.

Hidden Costs: While direct funds may have lower expense ratios, you could end up losing out due to lack of expert advice. Missed opportunities for rebalancing, avoiding taxes, or market corrections can cost you more than the 0.5%-1% saved on expenses.

Conclusion on Switching to Direct Funds
It’s clear that while direct funds may appear more cost-effective, the added value of professional advice and financial planning with regular funds can outweigh the small cost differences. The disciplined and guided approach will help you achieve higher returns over time and reduce risks from market volatility.

Enhancing Your Regular Mutual Fund Portfolio
Since you've already stopped investing in these funds, let's explore how you can grow your portfolio.

Review Existing Investments
Mid and Small-Cap Funds: These have done well for you with an XIRR of over 20%. Consider keeping your mid-cap and small-cap exposure intact, but periodically review fund performance.

Large-Cap and ELSS Funds: While large-cap funds like Aditya Birla Sunlife Frontline have delivered lower returns, they are stable. ELSS funds have given decent tax-saving benefits alongside reasonable returns. You might want to continue holding these, but avoid adding fresh investments into underperforming funds.

Asset Allocation Strategy
A well-diversified portfolio can balance risks and rewards. Here's how you can improve your asset allocation:

Increase Small-Cap and Mid-Cap Allocation: Given your experience, you may want to increase your exposure to mid-cap and small-cap funds. These funds provide high-growth potential, but with increased volatility. Allocating 30-40% of your equity investments to this sector can help capture growth opportunities over the long term.

Balance with Large-Cap and Multi-Cap Funds: Continue with a moderate allocation to large-cap and multi-cap funds to provide stability. These funds offer less volatility, especially in a turbulent market. A 20-30% allocation in these funds is recommended for steady long-term growth.

Add Hybrid Funds for Stability: Hybrid funds can balance risk and return by investing in both equity and debt. Consider adding balanced hybrid funds to smooth out market volatility, especially as markets fluctuate.

Tax Efficiency and Strategic Withdrawals
You must also consider the tax implications of your investments:

Capital Gains on Equity Funds: Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains are taxed at 20%. Plan withdrawals strategically to optimize tax impact. Avoid selling large chunks that result in high taxes.

Tax-Saving ELSS: Keep using ELSS funds for tax-saving purposes. If you hold them for the mandatory lock-in period of three years, you will also avoid short-term capital gains tax.

Rebalancing Your Portfolio
You’ve done well with your regular mutual funds, but rebalancing is key. Consider the following:

Periodic Reviews: Regularly review the performance of your funds with the help of a CFP. If a fund is underperforming for a prolonged period, it might be time to switch.

Lock-in Strategy: Don’t be hasty in exiting funds that are temporarily underperforming. Many funds go through rough phases, but long-term trends are more important than short-term hiccups.

Partial Redemption: If a fund is overexposed or giving high returns, consider redeeming partially to lock in profits. Reinvest those profits in new opportunities.

Investing in Tax Saver ELSS Funds
You've seen great results from the Mirae Asset ELSS with 24% XIRR, and the Axis Small Cap with 30% XIRR. These numbers indicate that your choice of funds is excellent.

Continue Investing in ELSS: These tax-saving funds are effective in not only reducing your tax liability but also generating strong returns. They have a three-year lock-in, which encourages disciplined long-term investing.

Small-Cap Focus: You have already tasted success with small-cap funds like Axis Small Cap. Consider increasing your small-cap allocation. But remember that small-cap investments are high risk, high reward. Avoid putting more than 30% of your total portfolio into small caps.

Systematic Withdrawal and Fresh Investments
Switch Gradually: If you decide to move to direct funds (though I recommend staying in regular funds), switch gradually. A phased approach minimizes the impact of market fluctuations. Consider setting up a systematic withdrawal plan (SWP) to redeem slowly and avoid large tax liabilities.

Fresh Investments: Any fresh investments should be directed towards funds that align with your long-term goals. Avoid adding more to underperforming funds.

Final Insights
You've shown an impressive understanding of the market and mutual funds. The transition from regular to direct funds might seem tempting but comes with added responsibilities and risks. I suggest you stay with regular funds under the guidance of a Certified Financial Planner.

Review and rebalance your portfolio regularly to keep it aligned with your financial goals. Keep a balance between high-growth small-cap funds and stable large-cap and multi-cap funds for long-term stability.

Use ELSS funds for tax-saving purposes and maintain tax efficiency in your investment strategy.

Keep a diversified portfolio that balances growth potential with risk management. Consider hybrid funds or balanced options for smoother returns.

Best Regards,
K. Ramalingam, MBA, CFP,
Chief Financial Planner,
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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Can you please suggest on capital gains as per Indian taxation laws arising in the below two queries : 1) property purchased with joint ownership, me and my wife’s name in 2015 at a cost of 64,80,000, housing improvements done for the cost of 1000000 and brokerages of 200000 paid and sold the same property at 10000000 in Dec 2023? 2) 87% of the proceeds got from the deal i.e 8700000, have been reinvested to pay 25% amount in purchasing another joint ownership property in Dec 2023, 3) I have invested in another under construction property in Nov 2023 by taking housing loan, which is on me and my wife’s name worth 1.4 cr, here the primary applicant is me only while wife is just made a Co applicant in the builder buyer agreement and also on the housing loan . So what are the LTCG tax liabilities arising from the above 3 scenarios for FY 2023-2024 and FY 2024-2025. I intend to sale off the property acquired in (2) by Dec 2024 and use that proceeds to close the housing loan for the property acquired in (3), will this sale of property be inviting any tax liabilities if the complete proceeds received from the sale of the property in (2) would be utilised to close the housing loan taken in Nov 2023 for the property in (3) ? Since in FY 23-24, I would be claiming the LTCG from the sale proceeds of 1) invested in the purchase of property in 2), and I intend to sale off this property in Dec 2024, will the LTCG claim be forfeited on the property sale in (1), should I hold this property at least for further 1 year so that sale of this property in 2) will not invite STCG?
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You jointly sold a Property during the year for Rs.76.80 lakhs (64.80+10.00+2.00), & sold the same for Rs.100.00 lakhs.
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You should avail exemption u/s-54 & file your ITR accordingly. Please disclose all details about sale & purchase in your ITR.
02. Now coming to the F/Y 2024-25 :
You intend to Sell Property No.2, which was acquired in 2023-24. Any Gain on Sale of it would be Short Term capital Gains & taxed accordingly.
Alternatively, you may hold this sale of property no.2 (for 2 years from its purchase) & avoid STCG
You are free to utilize the sale proceeds in a way you like, including paying off your housing Loan.
Please note to avail exemption u/s 54 only from investment in property no.3 & not 2.
Most welcome for any further clarifications. Thanks.

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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