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

A distributor with ARN is the empanelled distributor for an investor's Regular plan investment of Rs 10,00,000. The investor later wants to shift to the Direct plan of the same scheme. Which statement is correct?

Direct plan carries no distributor commission, so its expense ratio is lower and its NAV generally higher than the Regular plan's. Moving from Regular to Direct is treated as a redemption and fresh purchase, so exit load and capital gains tax may apply.

  1. AThe investor cannot switch because Regular and Direct plans are in different schemes legally
  2. BDirect plan has no distributor commission in its expense ratio, so its NAV is generally higher than the Regular plan's, and switching may carry exit load and tax consequencesCorrect
  3. CDirect plan has a higher expense ratio than the Regular plan
  4. DSwitching from Regular to Direct is tax-free in all cases

Explanation

Both plans share one portfolio, but the Direct plan excludes distribution commission, so its expense ratio is lower and NAV higher. A switch is treated as redemption and fresh purchase, so exit load and capital gains tax may apply. Hence the statement on tax-free switching is wrong, and the expense ratio claim is reversed.

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