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Should I shift my investment from regular to direct funds?

- Aditya Ghosh

In simple terms, direct plans are  a cheaper version of the regular plans. Direct plans are less expensive than regular plans because of lower expense ratio. In case of a direct plan, you do not have to pay the distributor’s commission, which you need to pay in case of a regular plan. The difference in expense ratio, depending upon the type of fund, varies between 0.08 per cent to around 1.4 per cent. It has been noticed that this gap of expense ratio is wider for new funds, probably because of higher commis- sions being paid by fund houses. Although in the shorter duration it may not have much of an impact, over a period of 5-10 years the difference in your corpus created by a lower expense ratio becomes noticeable.

So if you are managing your own investment and investing for a longer duration, you should always go for direct plans. However, there are two things that you should keep in mind before making this switch. One is that this shifting of investment is treated as redemption and fresh investment for the purpose of taxation.

So the gains made by you so far would be subject to tax. Secondly, in the case of equity funds, AMCs usually charge an exit load of 1-2 per cent for redemption within a year. Therefore, it is advisable to wait for a year before making such a transition in case of equity-dedicated funds. 

Should I use liquid funds, which give very low returns, to park emergency corpus?

- Yatin Shah 

The pandemic has changed the way many of us manage our personal finance. Emergency fund, which was not at the top of the mind for many of us, has now made on our priority list. It is a contingency fund that not only helps financially during most difficult times but also prevents the derailment of your saving for long-term goals. One should at least build an emergency corpus which can at take care of 6-9 months of family expenses. These expenses include household expenses and other liabilities like paying your EMIs and credit card dues. Emergency corpus is the money that you need at very short notice. Therefore, the most important factor when allocating for this purpose is a high degree of safety and liquidity.

Those are the kind of parameters that liquid funds can potentially fulfil. Of course, this money may remain invested for a reasonably long time as you never know when you land up in a contingency. So from that perspective, even if this money remains invested for a fairly long term in liquid funds that should be fine because your purpose with this allocation is not to derive returns. So don’t think of this money remaining invested in liquid funds as a sub-optimal allocation. Otherwise, the alternative you have is to keep this money lying idle in your bank account, where the chances of earning even less than a liquid fund are pretty high. Hence, you should just keep your emergency corpus in a liquid fund irrespective of the time horizon. 

 

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