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Should I switch my mutual fund investments from regular to direct plans now?

Ramalingam

Ramalingam Kalirajan  |8083 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jan 20, 2025

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
SACHIN Question by SACHIN on Jan 16, 2025Hindi
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MF advisor is not giving any services. Hence want all MF polio to be switch from regular plan(through advisor) to direct plan. Is it a right time to switch now as market is at low?

Ans: You are considering switching from regular to direct plans due to lack of service.

Your concern about market conditions before switching is valid.

Switching mutual funds requires careful analysis of costs, benefits, and future implications.

The Role of a Professional MFD
A Mutual Fund Distributor (MFD) with Certified Financial Planner (CFP) credentials offers essential services.

They provide tailored advice, portfolio reviews, and rebalancing strategies.

A professional MFD ensures your investments align with your financial goals.

Lack of service from your current advisor does not mean all MFDs are the same.

Why Switching to Direct Plans May Not Be Ideal
1. Lack of Guidance and Monitoring

Direct plans do not offer professional advice or personalised support.

Monitoring and optimising a portfolio on your own can be overwhelming.

2. Potential Errors in Asset Allocation

Without expert advice, it is easy to misallocate or overlook rebalancing needs.

This may impact long-term performance.

3. Tax Implications and Exit Loads

If you sell your current investments to switch, capital gains taxes may apply.

Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%.

Short-term capital gains (STCG) are taxed at 20%.

Additionally, exit loads may apply for funds held for less than a year.

4. Disadvantages of Self-Management

Direct plans require you to make all investment decisions independently.

It may result in missed opportunities or holding unsuitable funds.

Why Staying in Regular Plans Through a Professional MFD Is Better
1. No Tax Implications When Switching Advisors

Switching your investments to another MFD involves no redemption or reinvestment.

Your funds remain invested, avoiding any tax or exit load concerns.

2. Continued Guidance and Support

A qualified MFD provides ongoing reviews, updates, and recommendations.

They can guide you during market fluctuations and life changes.

3. Value Addition through Expertise

A professional MFD ensures diversification, goal alignment, and portfolio optimisation.

Their active involvement enhances your investment experience and outcomes.

Timing of the Switch
Markets being low is not a significant concern for switching advisors.

Your investment remains unaffected as no selling or buying is required during this process.

However, this is a good time to review your portfolio for long-term alignment.

Actionable Steps
1. Find a Reliable Professional MFD

Look for an MFD with CFP credentials who offers regular services and personalised support.

Check their track record, client feedback, and service offerings.

2. Discuss Your Portfolio and Goals

Share your current portfolio and financial goals with the new MFD.

They will review your holdings and suggest improvements if needed.

3. Initiate the Change Without Redemption

Request a change in the broker code to shift your investments to the new MFD.

This process is seamless and does not involve redemption or tax implications.

4. Plan for Periodic Reviews

Schedule regular portfolio reviews with the new MFD.

This ensures your investments remain aligned with your goals.

Final Insights
Switching to a professional MFD is a wise decision if your current advisor is unresponsive. Direct plans may seem appealing but often lack the guidance needed for optimal performance. A professional MFD ensures ongoing support, better returns, and peace of mind. This is the right time to shift, as no tax or market timing issues are involved.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment
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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You may like to see similar questions and answers below

Ramalingam

Ramalingam Kalirajan  |8083 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jan 10, 2025

Money
I have arount 1500000 invested in MF through an advisor. But now advisor is not giving any services. Is this any soloution to make it direct investment. And if so is it right time to switch to direct as fund value is decresed substantially due to market.
Ans: You have Rs. 15 Lacs invested in mutual funds through an advisor.

The advisor is no longer providing services, leaving you without proper guidance.

The market downturn has reduced your portfolio value substantially.

You are considering switching to direct investments to avoid advisor dependency.

Understanding Regular and Direct Plans
Regular Plans
Regular plans include an advisor’s commission in the expense ratio.

Advisors provide portfolio monitoring and personalised guidance.

Higher expense ratio compared to direct plans.

Direct Plans
Direct plans exclude advisor commissions, reducing the expense ratio.

You need to research and manage investments independently.

Requires knowledge of markets, schemes, and portfolio management.

Impact of Market Conditions on Switching
Current Market Downtrend
Your portfolio is already under stress due to market fluctuations.

Switching now could realise losses if you redeem units for the switch.

Timing Consideration
Markets typically recover over time; wait for partial recovery.

Avoid selling at a loss unless a fund is underperforming consistently.

Disadvantages of Direct Plans
Lack of Expert Guidance
Direct plans shift the responsibility of fund selection to you.

Without market knowledge, decision-making can become challenging.

Emotional Decisions
Investors often panic and redeem during market corrections.

An advisor helps maintain discipline during market volatility.

Missed Opportunities
Advisors can identify better opportunities and schemes.

Regular plans through a Certified Financial Planner (CFP) offer a structured approach.

Addressing Your Current Situation
Option 1: Stay Invested and Change Advisor
Find a new advisor with CFP credentials for better services.

Continue with regular plans under the new advisor’s guidance.

This ensures professional advice and disciplined investing.

Option 2: Gradual Switch to Direct Plans
Switch only if you have the expertise to manage your portfolio.

Use a step-by-step approach; shift one scheme at a time.

Monitor the performance of the new direct plans regularly.

Avoid rushing the process, as it may lead to mistakes.

Option 3: Consolidate and Restructure
Evaluate each mutual fund for performance over three to five years.

Exit underperforming funds gradually to avoid unnecessary losses.

Reinvest in actively managed funds with proven track records.

Tax Implications of Switching
Selling mutual funds involves capital gains tax liability.

Equity mutual funds: Long-term capital gains above Rs. 1.25 Lacs taxed at 12.5%.

Debt mutual funds: Capital gains taxed as per your income tax slab.

Consider the tax impact before redeeming or switching funds.

Recommendations for a Stable Portfolio
Diversification
Ensure a mix of equity, debt, and hybrid mutual funds for balance.

Equity funds provide growth; debt funds add stability.

Emergency Fund
Keep 6-12 months’ expenses in liquid funds or fixed deposits.

Avoid using this amount for switching investments.

Regular Monitoring
Review your portfolio performance every six months.

Rebalance to align with financial goals and risk appetite.

Final Insights
Switching to direct plans is an option but requires expertise.

Retaining regular plans with a new advisor ensures professional guidance.

Assess your financial goals and portfolio performance before making changes.

Avoid hurried decisions during a market downturn to prevent losses.

A Certified Financial Planner can help optimise your portfolio effectively.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

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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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