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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.
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.
You can switch from a regular plan to direct plan in two ways:
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