mutual funds direct and indirect amount calucation

 

Assumptions:

  1. Investment: ₹10,00,000
  2. Tenure: 5 years, but cashing out after 3 years.
  3. Value after 3 years: ₹30,00,000.
  4. Direct Plan: No commission.
  5. Regular Plan: Includes commission (usually 0.5%-1.5% annually).
  6. Taxation:
    • Mutual fund returns are taxed as capital gains.
    • Equity-oriented funds:
      • Long-Term Capital Gains (LTCG) > 1 year: 10% (above ₹1 lakh).
    • Debt-oriented funds:
      • Long-Term (>3 years): 20% with indexation benefit.
      • Short-Term (<3 years): Taxed as per income slab.

Calculation Steps:

1. Value Difference: Direct vs. Regular

  • Regular plans have an expense ratio higher than direct plans due to distributor commissions.
  • Assume:
    • Direct Plan CAGR: 20% (compounded annual growth rate).
    • Regular Plan CAGR: 18.5%.

Value after 3 years:

  • Direct Plan:
    10,00,000×(1+20%)3=17,28,000.10,00,000 \times (1 + 20\%)^3 = ₹17,28,000.
  • Regular Plan:
    10,00,000×(1+18.5%)3=16,59,211.10,00,000 \times (1 + 18.5\%)^3 = ₹16,59,211.

2. Tax Implications (if redeemed after 3 years):

Since you are cashing out after 3 years:

  • Equity Fund: LTCG applies.
  • Debt Fund: LTCG with indexation.

For Equity Funds:

  • Gain = Final Value - Initial Investment = ₹30,00,000 - ₹10,00,000 = ₹20,00,000.
  • LTCG Tax = 10%×(20,00,0001,00,000)=1,90,00010\% \times (₹20,00,000 - ₹1,00,000) = ₹1,90,000.

Post-tax Redemption Value:

  • Direct: ₹30,00,000 - ₹1,90,000 = ₹28,10,000.
  • Regular: ₹29,59,211 - ₹1,90,000 = ₹27,69,211.

For Debt Funds:

Debt funds held for 3+ years benefit from indexation (adjusting purchase price for inflation). Assuming an indexation factor of 1.15:

  • Indexed Purchase Price = ₹10,00,000 × 1.15 = ₹11,50,000.
  • Taxable Gain = ₹30,00,000 - ₹11,50,000 = ₹18,50,000.
  • LTCG Tax = 20%×18,50,000=3,70,00020\% \times ₹18,50,000 = ₹3,70,000.

Post-tax Redemption Value:

  • Direct: ₹30,00,000 - ₹3,70,000 = ₹26,30,000.
  • Regular: ₹29,59,211 - ₹3,70,000 = ₹25,89,211.

Final Summary:

Fund TypePlanPost-tax ValueTax Paid
Equity FundDirect₹28,10,000₹1,90,000
Regular₹27,69,211₹1,90,000
Debt FundDirect₹26,30,000₹3,70,000
Regular₹25,89,211₹3,70,000

Conclusion:

  • Direct Plans always provide higher returns because they have lower expense ratios.
  • Equity Funds are more tax-efficient than debt funds for long-term investments.

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