A client holds Rs 1.5 crore in regular mutual fund plans with a Rs 50 lakh embedded gain. Moving to direct plans saves 0.8% a year but triggers capital gains tax at an illustrative 12.5%. How many years does it take to break even?

About five to six years: the simple payback is 5.2 years and the account values cross at about 5.9. The switch costs Rs 6.25 lakh of tax now and saves about Rs 1.2 lakh a year, growing with the portfolio. For a client holding ten years or more it is worth doing, and it gets cheaper when done in tranches that use the annual exemption, starting with the units that carry the least gain.

A one-off cost against a yearly saving. It is the same sum as replacing an old air conditioner: you pay for the new one today and the lower electricity bill pays it back over some years. Here the upfront cost is Rs 6.25 lakh of tax on the Rs 50 lakh gain, and the yearly saving is 0.8% of Rs 1.5 crore, Rs 1.2 lakh, so the simple payback is 5.2 years. The 0.8 points is the gap between a regular plan and a direct planThe version of a mutual fund bought without a distributor, carrying no commission and so a lower expense ratio, with the same portfolio. of the same fund.

Because the Rs 6.25 lakh paid in tax would otherwise have kept growing. The switch path starts at Rs 1.4375 crore and grows at 10.8%; the stay path starts at Rs 1.5 crore and grows at 10%. The switch path overtakes at about 5.9 years and is about Rs 11.8 lakh ahead by year ten, because the fee saving compounds on a growing base while the tax was paid once.

Partly, and this is the sharper point to make in the room. If Omkar will sell these units some day anyway, the Rs 6.25 lakh is tax he owes already; the switch only brings the payment forward, so the true cost is the growth lost on that sum, not the sum itself. On that view the switch is ahead much sooner. The five-to-six-year figure is the cautious answer for a client who might hold until death or never realise the gain.

Three moves, each with a number attached. Switch in yearly tranches sized so the realised gain sits within the annual exemption, which the client must confirm, so part of the move is tax-free each year. Switch the units with the smallest gains first, since they carry the fee saving at the least tax. And send every new SIP to the direct plan from today, which costs nothing. The one thing not to do is leave the whole Rs 1.5 crore where it is because the tax looks large, since every year of waiting costs another Rs 1.2 lakh.