How to Switch from Regular To Direct Mutual Funds?

 

Every mutual fund comes in two variants– Regular Plan and Direct Plan. Whether you opt for a regular or a direct plan you get the same mutual fund scheme, run by the same fund manager who invests in the same stocks and bonds, but with a difference in expense ratios.

What are Direct and Regular Plans

Direct and Regular Plans are two options for buying the same mutual fund scheme. A Direct Plan is where you buy a mutual fund directly from the fund house or the AMC (Asset Management Company) without the involvement of an agent or intermediary in the process of investing. On the other hand, a Regular Plan is where you invest in a mutual fund scheme with the help of an intermediary. In investments through regular plans, the investor is liable to pay a commission to the fund house who ultimately pays the required commitment to the intermediary.

The only major difference between the two plans is that in a regular plan, you will have to incur higher expenses (which majorly includes the management fee for your funds by professionals known as the Expense Ratio). Owing to this, the returns earned on direct plans are eventually higher than the ones earned in regular plans. This is because in case of investment through the direct plan, the commission is added to your investment balance, which reduces the expense ratio of your mutual fund scheme and increases your returns over the long-term.

How to switch from Regular to Direct Plan of a Mutual Fund Scheme

Before you choose to switch from a regular to a direct plan of mutual funds, you must note that for most funds, this will be treated as a Redemption for the regular plan. The process and the expenses to be incurred during this switch will be the same as the ones incurred at the time of redemption of mutual funds.

• Online Mode

The online mode or the web interface for investing in mutual funds is different for different platforms. If your fund does not have an option to ‘Switch from Regular to a Direct Plan’, you will have to select the ‘Redeem funds’ option for the current scheme and then place a purchase order for the direct plan of the same scheme after the redeemed amount is credited to your account.

However, some other platforms may give you the option to switch directly. In such a case, you must follow the given steps-

Step 1: Log in to your mutual fund account

Step 2: Go to the ‘Dashboard’ where all your mutual fund investments are listed

Step 3: Select the mutual fund scheme against which you find the word ‘Regular’ written

Step 4: This will display all the details related to that scheme. Click on the ‘Switch to Direct’ option available on the page

Step 5: Click on the ‘Confirm’ button and you are done. Now whenever you visit the ‘Dashboard’, you will find the word ‘Direct’ written against your invested scheme

It must be noted that for the tax and exit load purposes, such a switch is actually a redemption of the old scheme and a fresh purchase for the new one.

• Offline Mode

Switching from Regular to a Direct of your Mutual Fund Scheme through the offline mode will require you to follow the given steps-

Step 1: Visit the nearest branch of the mutual fund house in whose scheme you have invested

Step 2: Ask for a ‘Switch’ Form. If this option is not available with your fund house, you need to ask for a Redemption form

Step 3: Fill in the required details, Sign and Submit it

Step 4: You will receive an email from the fund house when the switch is processed. In case of redemption, you will have to fill up a fresh purchase form for the direct plan once the money gets credited to your account

Why you should Switch from Regular to Direct Plan

When the motive is to get better returns, a plan that benefits you the most is preferable. It is always wiser to invest money in the direct variant of a mutual fund scheme rather than the regular plan as with the direct plan the investor has to pay a comparatively lower expense ratio and also gets higher returns due to reinvestment and compounding of the amount which gets paid as commission in regular mutual fund plans.

Things to consider while switching from Regular to Direct Plan

• Lock-in Period- Regular investments can be transferred to direct plans only if the lock-in period of the regular units has ended. Locked-in units such as units of ELSS schemes prior to completion of the 3 year lock-in period and closed-ended schemes cannot be switched from the current scheme to a new direct mutual fund unless the lock-in period of the scheme has ended.

Suggested Read: Best ELSS options to invest in 2020

• Exit Load: Exit load is applicable to units of various schemes belonging to various mutual fund categories such as equity, debt and hybrid for varying time periods. As a result, you need to ensure that the current plan you have invested in does not feature an exit load. The application of exit load decreases the value of the redemption, which in turn reduces the amount invested into the direct scheme.
• Taxation: Switching from the regular plan to the direct plan of a mutual fund scheme is considered as a redemption. Thus, the switch does attract the application of capital gains tax. The following table illustrates the application of capital gains tax on mutual funds.

Asset Class	Holding Period	Rate of Tax on Capital Gains
Equity Fund	Short Term (Less than 1 Year)	15%
Equity Fund	Long Term (1 Year and more)*	10%
Debt Fund	Short Term (Less than 3 Years)	As per investor’s income tax slab
Debt Fund	Long Term (3 Years and more)	20% with indexation
Aggressive Hybrid Funds	Aggressive hybrid funds are taxed like equity funds.
Other Hybrid Funds	If more than 65% of assets of these funds are invested in equity, then hybrid funds are taxed like an equity fund. Otherwise, they are taxed like debt funds.

*Long-term capital gains on equity mutual funds are exempt up to Rs. 1 lakh per annum

You can read more on the taxation of mutual funds here.

Best Direct Mutual Fund Schemes You can Invest in 2020

Fund Name	Type of Fund	AUM (In Crore)	3-year Return (In %)	5-year Return (In %)
SBI Equity Fund	Aggressive Hybrid	32,470	2.26	4.55
ICICI Prudential Balanced Advantage Fund	Hybrid	28,092	-0.22	3.98
Axis Long Term Equity Fund	Equity- ELSS	21,659	2.40	3.95
Mirae Asset Large Cap Fund	Equity	16,734	-2.07	3.09
ABSL Savings Fund	Conservative Hybrid	16,489	7.76	8.24
Axis Banking & PSU Fund	Debt	14,469	8.70	8.58

Data as on 7 April 2020; Source: Value Research

FAQs

Ques. Can I change my mutual fund from regular to direct?

Ans. Yes. You can change your mutual fund from a regular to a direct plan. However, since this switch is considered as the redemption of one scheme and new investment to the other (via direct plan), there are certain expenses that you will have to incur during the process.

Ques. What is the difference between direct and regular mutual funds?

Ans. The major difference between a direct and a regular plan is that in a regular plan, the investors have to pay an expense ratio as a commission to the intermediaries, which eventually results in lower returns. On the other hand, investments through direct plans offer higher returns and no expense ratio.

Ques. How do I start a direct mutual fund?

Ans. You can start investing in a direct mutual fund either by visiting the fund house physically or through the online mode. You can visit the AMC’s own website or an online platform such as paisabazaar where you can choose from and compare more than 1,700 funds- all in one place.

Ques. Why is the NAV of a direct plan higher than a regular plan?

Ans. The NAV of a direct plan is higher than that of a regular plan. This is because the NAV of a fund is recorded after deducting the expenses such as the Expense Ratio of the fund. Now, the expense ratio of a regular plan is higher, hence, its NAV is lower. However, it must be noted that the NAV of a fund implies only the value of the portfolio of the fund. A lower NAV cannot be taken for a sign of a cheaper fund.

Ques. Is switching of mutual funds taxable?

Ans. Yes. Since switching of mutual funds from a regular to a direct plan is considered as redemption, the taxation rules while switching the plan is similar to that applied while redeeming. If equity-based mutual funds are held for more than a year then they are not taxable for the investor. But if it is redeemed after 1 year, then the gains would attract a long term capital gains tax of 10% along with surcharge and education cess if the capital gains exceed Rs.1 lakh. And if the same fund is invested in non-equity based mutual funds, then it would be taxable at the rate of 20% with indexation if it is held for less than 3 years.

Ques. Which is the best direct mutual fund?

Ans. The best direct mutual funds to be invested in 2020 are as below-

• SBI Equity Fund
• ICICI Prudential Balanced Advantage Fund
• Axis Long Term Equity Fund

Ques. What is switch in and switch out in mutual funds?

Ans. Switching-in of mutual funds implies the switching of fund houses whereas switching-out of mutual funds implies switching of mutual funds.