10.3 Investment Plans and Services

Two Decisions, Not One

An investor choosing a scheme makes two further choices that are frequently confused:

1. Which plan — regular or direct. This determines cost.
2. Which option — growth or IDCW. This determines whether income is distributed or accumulated.

The two are independent. All four combinations exist: regular growth, regular IDCW, direct growth, direct IDCW.

Regular Plan and Direct Plan

Both plans hold exactly the same securities managed by the same person. The only difference is the expense ratio, and because expenses accrue daily the NAVs diverge steadily.

Direct plans were introduced in 2013. The determinant of which plan applies is whether a distributor code is quoted, not the medium used — an investor transacting on an AMC website while quoting an ARN is in the regular plan.

Growth Option

No income is distributed. All gains remain in the scheme and are reflected in a rising NAV.

• Units held remain constant; NAV grows
• No tax until redemption, and then at capital gains rates
• Gains compound within the scheme

For most investors who do not need periodic cash, this is the appropriate option, and the reasoning is set out in section 9.3: for a high-slab investor in an equity-oriented scheme, distributions taxed at 30% compare unfavourably with long-term capital gains at 12.5%.

IDCW Option

Income is distributed from realised gains and distributable surplus, and NAV falls by the amount distributed.

IDCW reinvestment is the least attractive combination and is chosen surprisingly often. The investor receives nothing in hand, pays income tax on the distribution, and pays stamp duty on the units issued against it. If accumulation is the objective, the growth option achieves it without either charge.

Systematic Services

Beyond plans and options, schemes offer transaction services covered fully in section 10.10:

• Systematic Investment Plan (SIP) — invest a fixed amount at fixed intervals
• Systematic Transfer Plan (STP) — move a fixed amount periodically from one scheme to another
• Systematic Withdrawal Plan (SWP) — redeem a fixed amount periodically
• Dividend Transfer Plan — route distributions from one scheme into another
• Trigger facilities — act automatically on a defined event, such as a value or date threshold

Other Services

• Nomination — up to ten nominees may be registered per folio
• Online access — transaction and portfolio viewing through AMC, RTA and platform channels
• Consolidated Account Statement — across all funds linked to the PAN
• Pledge or lien — units may be pledged as security for a loan, with the lien marked in the records
• Demat holding — units may be held in dematerialised form
• Switch — move between schemes or options, remembering that it is a redemption for tax purposes

Advising on Plan and Option

The practical guidance a distributor should be able to give:

The recommendation that most often needs correcting is IDCW reinvestment, and the correction costs the investor nothing but a switch instruction.

How the Plan Is Actually Determined

The plan is not something the investor ticks and the AMC honours. It is derived from the form:

• ARN quoted in the distributor block, with EUIN or an execution-only declaration — the application is processed under the regular plan.
• ARN left blank — the application is processed under the direct plan, whatever the investor wrote in the plan field.

This mechanical rule produces two recurring problems. An investor who intends to invest direct but writes an old distributor's ARN out of habit lands in the regular plan. An investor who intends to route business through a distributor but submits the form without the ARN lands in the direct plan, and the distributor is not paid on that folio.

Moving Between Plans and Options Is a Redemption

Switching from regular to direct, or from IDCW to growth, is executed as a redemption from one plan or option and a fresh purchase into the other. Three consequences follow, and all three are examinable:

1. Capital gains arise on the units being switched out, at the rate applicable to the scheme type and holding period.
2. Exit load may apply if the units have not completed the load period.
3. A new holding period begins for the units acquired, and stamp duty at 0.005% is charged on the purchase leg.

A switch is therefore not a free administrative correction. Where the investor's position is large and the gain material, the sensible advice is often to direct future contributions to the preferred plan or option and leave the existing units undisturbed.

Liquidity Services

Two facilities are worth knowing by name. The Instant Access Facility permits online instant redemption from a liquid scheme of up to INR 50,000 or 90% of the folio value, whichever is lower, per day per scheme per investor, available to resident individual investors, with units redeemed at the lower of the previous day's NAV and the prospective NAV. Trigger facilities automate an action — a switch, a redemption or a rebalance — when a stated index level, NAV level or date is reached, which removes the need for the investor to be watching.