For investors keen to move from commission-based mutual fund advisory to fee-only advice, a common question is: How can I shift my portfolio from a mutual fund distributor (MFD) to a registered investment adviser (RIA) without disrupting investments or triggering avoidable taxes?
The shift essentially involves moving from a regular plan, where commissions are built into the expense ratio, to a direct plan, which excludes distributor commissions and typically has lower costs. In the latter, you pay a fixed fee to the RIA.
How to move
Investors broadly have two options. First, switch the regular plan to a direct plan for the same fund. This is treated as a redemption from the regular plan and a fresh investment into the direct plan of the same scheme.
Praveen Shankaran, chief operating officer, domestic fund services, KFintech, said MF units cannot be transferred or re-tagged directly from regular to direct because the plan type is embedded in the scheme structure. “A switch is effectively a sell-and-buy transaction within the same folio. Hence, it is considered a taxable event,” he said.
Most asset management companies allow switching from regular to direct plan within the same scheme and typically do not attract exit loads, though scheme-specific terms must be checked. “The benefit in this option is that investors need not redeem and open a new folio. However, even within the same folio, a switch is technically treated as redemption and attracts capital gains tax,” said Shankaran.
The only non-taxable route is to stop ongoing SIPs in regular plans and restart them in direct plans of the same schemes. This approach avoids any immediate tax outgo because there is no redemption involved, but you continue paying a higher expense ratio on the old corpus. The difference in expense ratio between regular and direct plans can range from 30 to 100 basis points (bps).
There are three ways to execute the switch. One, by placing the switch request online to each AMC individually. Second, by using investor services platforms like MF Central or MF Utility (MFU) instead of going through each AMC portal individually. Third, through a registrar and transfer agent (RTA).
If you hold your MF holdings in a demat account, the process is the same, according to a CAMS spokesperson. “However, the transactions must be routed through the respective depository participant (DP), not directly through the AMC or RTA.”
How to make the switch tax-efficient
A one-time switch of the entire portfolio can lead to huge capital gains outflow if you hold big gains. Long-term capital gains (LTCG) on equity funds are taxed at 12.5% (on amounts exceeding ₹1.25 lakh), while those on debt funds are taxed at the investor's slab rates. Short-term gains from equity funds sold within one year of purchase are taxed at 20%.
Abhishek Kumar, RIA and founder of Sahaj Money, said investors can maximize tax efficiency by applying a unit-level FIFO analysis to identify ‘tax-neutral’ units with no gains or units currently sitting at a loss, which can be moved immediately without tax liability. FIFO, or first in, first out, is a method in which the units purchased earliest are sold first.
Additionally, utilize the ₹1.25 lakh exemption limit in the case of equity funds to redeem a part of the folio towards the end of the fiscal year and the remainder in the next year. “Investors can also strategically implement tax-loss harvesting. Sell the underperforming or loss-making schemes and use those to offset gains from profitable ones,” said Kumar.
LTCG can be offset with both long-term and short-term losses, as well as losses from house property. However, STCG can only be offset with short-term losses and house property losses.
Kumar added that for a big corpus in several crores, it is advisable to spread the redemptions across 12 to 18 months to avoid heavy exit loads and STCG taxes. “Investors can first stop all regular plan SIPs and redirect the SIP to direct plans. After redirecting the SIP, one can use a tiered approach of moving from loss-making or stagnant units first, followed by phased switches of high-gain units to utilize the ₹1.25 lakh exemption, ensuring the portfolio is simultaneously ‘cleaned’ of overlapping or underperforming schemes,” Kumar explained.
While this shift may entail immediate taxes, it can save you substantially in commissions and high expense ratios paid over several years of investing.