Are you confused about shifting to direct plan of mutual funds? When the motive is to earn higher returns, a direct plan is the one that gives you higher take-home returns. Understand how a direct plan beats the regular plan.
Mutual fund investment is becoming a popular investment avenue compared to traditional instruments like PPF, fixed deposits, and more. Investing in a mutual fund has become simple and hassle-free. There are two ways in which you can invest in mutual fund schemes – Direct route or the regular route. Shockingly, a recent survey of mutual fund investors has highlighted that more than 90 per cent of the investors were unaware of the very existence of "direct route” of mutual funds.
Every mutual fund plan comes with two options – Regular plan and direct plan. When you invest in a mutual fund without the involvement of an agent, broker or a distributor, you invest in the direct plan. On the other hand, when you invest in a mutual fund through agent, broker or any intermediary, you generally invest in a regular plan.
Since the direct mutual fund plan does not involve an intermediary, the fund house does not pay distribution fees or a commission to a broker. Whereas in case of regular plans, the distribution fees or commission is paid out from your investment, which results in reducing your take-home returns. Due to the absence of commissions, direct plans offer high returns and low expense ratio.
If you want to switch from a regular plan to direct plan, you would have to sell your current investment and purchase a new one. Moreover, if the investment is in a lock-in period, then you have to wait for the same to expire.
Is it possible to switch from a regular plan to direct plan?
It is possible to shift your mutual fund investment from a regular plan to direct plan. However, switching is considered as redemption from the existing plan. Switching from regular to direct plan invites exit load and tax implications for you.
- Exit load: Mutual fund houses charge an amount to investors when they join or leave a mutual fund scheme. This fee charged is generally termed as "load". Exit load is an amount charged from you for leaving a scheme as an investor. You should consider exit load implication at the time of switching as it reduces the value of redemption.
- Taxation: Switching from regular to direct plan of a mutual fund scheme is considered as leaving the existing scheme and entering into a new one. Therefore, it attracts capital gain tax.
How to switch a regular plan to direct plan?
You can switch from a regular plan to direct plan in two ways:
- Online method: Login online to the mutual fund account provided by your fund house. Go to the transaction page where you can buy, sell and redeem your mutual fund units. Choose the “Switch” option and select the mutual fund scheme you want to switch. Select the “Direct plan” option. The changes will reflect in your account within four business days.
- Offline method: If you are not familiar with the online procedure, you have an option to switch your plan in person. You can visit the nearest branch of the fund house and ask for a switch form. Enter the details like portfolio number and the fund name. Once the procedure is completed, you will receive an updated account statement.
What should you do?
- Stop the SIP of the regular plan of your mutual fund scheme. Start a fresh SIP in the direct plan.
- For the regular plan, if MF units that have completed their exit load period, switch those units to a direct plan.
- For the remaining units of the regular plan, you can wait until the exit load period gets over. Simultaneously, you can switch to direct plan. This way, you can save on capital gain tax and also do not pay an excess of exit load.
Benefits of switching from regular plan to direct plan
Cost-effective: Direct mutual fund plans are profitable as you save commission fees and distribution costs. Lower costs of direct plans result in higher Net Asset Value and better returns.
Simplistic approach: Direct plan makes the entire mutual fund investment process simple. A large portion of equity fund investors in the country has a relatively small corpus to invest. Such a small amount of investment may not require much complexity and analysis.
Better interaction with the mutual fund: Direct route of investing in a mutual fund gives you an opportunity to interact with your mutual fund portfolio directly. In case of regular plan, it is the broker who takes the entire burden, and therefore, you may not get a chance to get familiar with your investment. In the case of direct investing, you get in touch with your investment portfolio directly.
Compounding returns: Direct plans help you to enhance your returns a lot more when we talk about a long investment horizon. Mutual fund SIPs are based on compounding principal, and the cost-benefit gets compounded over a period of time. A direct plan makes it a lot more meaningful over a longer period.
Direct mutual fund plans work better and have a significant impact when the market returns are lower. When returns are high, you may not care much about the additional cost. But when the market is volatile, and profits are unfavourable, direct plans can make a greater difference.
If you want to design your mutual fund investment portfolio, and monitor it on your own, you can consider shifting to direct plan. Switching from a regular plan to direct plan is considered as exiting from a regular plan and start new investment into a direct method of the mutual fund scheme. You may have to pay certain costs while switching between the plan, but in the long run, it will help you to maximize your take-home returns. Moreover, even if you invest in a direct mutual fund plan, you can still consult with an investment advisor for guidance on investing and managing your portfolio.
Recommended Read: Things to Know While Investing in the Right Mutual Fund