Want to become rich? Here is your money accumulation tip

Mutual Funds offerings accelerate wealth creation and the schemes on offer have 2 options — Direct and Regular. These are empowering those investors who believe in investing like the batting style of Cheteshwar Pujara and withdrawing like Rishabh Pant! When one buys into a mutual fund scheme through a distributor, broker, or bank, it is usually a regular mutual fund. However, mutual fund distributors get commissions from the money you paid and that leads to lesser profit for you. However, investors can stop this payment by buying into a direct mutual fund. Investors can earn around 1 per cent higher returns on investment by opting for Direct Funds. How this one per cent can help an investor become rich can be understood by an example - a change by 20 bps in new Total Expense Ratio (TER) helps an investor earn around Rs 5 lakh over a period of 20 years through direct investment route.

Varun Sridhar, CEO, Paytm Money said, “Our intention to offer direct mutual funds for free i.e without incurring any commissions and with a fully transparent approach is to gain investor trust. Investing in direct mutual funds through Paytm Money will increase your returns by around 1 per cent as opposed to regular schemes.” Sridhar went on to add that in October 2018, SEBI rationalized Total Expense Ratio (TER) of mutual funds to protect interest of the investors.

How would you be benefitted from this?

ON how this rationalization of the TER helps an investor Sridhar said, "A mere 20 basis point change in TER can earn you over Rs 5 lakh more over a period of 20 years. The expense ratio of the Direct Plan is always lesser than the Regular Plan for the same mutual fund scheme. By switching from Regular Plans to Direct Plan of mutual fund schemes you can make sure that you keep earning more on your investment."

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A switch transaction involves redeeming units from the regular plan and making a fresh investment in a direct plan, exit load (if any) and capital gains tax would apply.

Elaborating upon how STCG and LTCG taxes portrays its role in the money making process via mutual funds; SEBI registered tax and investment expert Jitendra Solanki said, "In equity mutual funds, if an investor switches within one year of investment, he or she will have to pay 15 per cent Short Term Capital Gain (STCG) tax including applicable surcharge. However, in the case of switch after one year of investment, Long Term Capital Gain will be applied over Rs 1 lakh income." Singhal said that LTCG is taxed 10 per cent of the net income beyond Rs 1 lakh.

"In the case of debt funds, if you switch within 3 years from the date of investment, then the STCG will be taxed as per your applicable slab rates. However, if you switch after 3 years from the date of investment, then the LTCG will be taxed at 20 per cent after indexation benefit," concluded Varun Sridhar of Paytm Money.