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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Fund Distribution and Channel Management Practices

A distributor processes an investor's request in a regular plan. Which of the following is the MOST appropriate consequence of the investor switching from a regular plan to a direct plan of the same scheme?

Moving from a regular plan to a direct plan is treated as a redemption and fresh purchase, so exit load and capital gains tax may apply. The investment no longer carries distributor commission. It is permitted and is not tax-free, even though the underlying scheme is the same.

  1. AThe distributor continues to earn trail commission on the switched amount
  2. BThe switch is treated as a redemption and fresh purchase, which may attract capital gains tax and exit load, and the distributor ceases to earn commission on that amountCorrect
  3. CThe switch is tax-free because the scheme remains the same
  4. DThe switch is not permitted under SEBI rules

Explanation

Regular and direct plans are separate plans with different NAVs. A switch is a redemption from one and purchase in the other, so exit load and capital gains tax may apply. The distributor's commission stops as the investment moves to the direct plan.

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