In the year 2012, SEBI instructed all asset management companies (AMCs) in India to launch direct plans of all mutual fund schemes. Thus, since January 2013, every mutual fund scheme comes with two options: regular plan and direct plan. Whether an investor chooses a regular plan or a direct plan, he/she primarily invests in the same mutual fund scheme that is managed by the same fund manager. The fund invests in the same securities, and the only difference between the two plans is the expense ratio.
If you are looking to switch from a regular mutual fund plan to a direct plan, here is all the information you will need while doing so.
The two main options for investing in a mutual fund scheme are direct and regular plans.
This plan allows an investor to buy a scheme directly from the AMC, fund house, or no commission no fee app-based investment platform like Finity. This eliminates the need for an agent or intermediary through the investment process. The commission that is normally paid to the agent/distributor is added back to the investment balance of an investor’s portfolio and this brings down the expense ratio. Thus, investors can gain higher returns in the long run as compared to regular plans.
In a regular plan, an investor invests in a scheme through an intermediary. Here, the investor has to pay a commission to the AMC, which is then passed on to the intermediary. Regular plans involve higher expense ratios due to the management fees applicable. Thus, the returns from these could be lower as compared to direct plans.
What is the process for shifting between regular and direct plans of mutual funds?
Before switching from a regular plan to a direct plan, investors must note that it will be considered as redemption by most regular plan schemes. Therefore, the associated expenses like exit load or capital gains tax, as applicable will have to paid on switching from regular to direct plans. Here is how investors can switch between regular and direct plans:
Mutual fund investors can switch from regular mutual fund schemes to direct to save on the expense ratio or costs. This request can be placed online as well as offline mode. Different online platforms have different steps to be followed for switching between regular and direct mutual fund schemes. In case the fund invested does not show an option to switch between plans, the investor must select the ‘redeem funds’ option and separately place an order for the scheme’s direct plan. This can be done once the redemption amount is credited back to the investor’s account.
Online Mode for switching on Finity app
Investors can switch from direct to other direct funds within the same AMC through the Finity app.
For switching between plans, investors must write an email to firstname.lastname@example.org requesting a switch from regular to direct plan on Finity app. Investors must also attach a statement of account of the fund that he/she wishes to switch. Finity’s transaction team will then place a switch request online and this process usually takes 5-6 business days.
The app does not have an option to switch funds from other brokers to Finity through the app.
Investors who are not comfortable doing the switch online can take the offline route and visit the respective AMC branch to fill up and submit the switch form. Here are the general steps to be followed for the same:
- Visit the nearest AMC branch of the scheme invested
- Request for a ‘Switch’ form, in absence of which, ask for a Redemption form
- Fill in the required details and then sign it before submitting
- Investors will receive an email from the AMC after the switch has been processed. For redemption requests, an investor has to fill up a separate purchase form to invest in the direct plan after money has been credited to the account.
What are the benefits of switching from regular to direct plans?
Every investor aims to fetch reasonable benefits from a mutual fund investment. Therefore, to invest wisely, it makes sense to opt for the direct plans of mutual fund schemes instead of regular plans. Here are some of the top benefits of switching from regular to direct plans:
With a direct plan, an investor pays a comparatively lower expense ratio and increases the chances of getting higher returns through reinvestment plus compounding of the amount that would otherwise be paid as commission in regular schemes.
2. No dependency on agents and distributors
Most investors were dependent on distributors and other third-party agents to invest in mutual funds until the recent entry of online platforms. Most of these channels used to focus on selling regular schemes to investors, thereby depriving investors of the benefits of direct plans.
3. Higher returns
By saving on commission and thereby lower expense ratio, investors of direct plans can aim for higher returns in the long run. This can especially benefit equity mutual fund investors, which are normally high on expense ratios.
Factors to note before switching from regular to direct plans
Here are some of the important aspects that investors should bear in mind before switching from regular to direct plans:
1. Lock-in Period-
Investors can switch from regular plans to direct plans only if the lock-in period (if any) has ended on the mutual fund investment. This is applicable especially in ELSS schemes which cannot be switched from regular to direct before completion of 3 years. Same goes for closed-ended funds, where the mandatory lock-in period must have ended for a switch request to be considered.
2. Exit Load-
If the current mutual fund plan has exit load, the value of redemption will come down and thereby reduce the amount available for investment in a direct plan. Since many mutual fund schemes have an exit load, it is important for investors to check for the same before making a switch.
Since switching from regular to direct plan is considered as redemption as far as tax calculations are concerned, investors may end up paying higher tax on the capital gains. Long-term capital gains attract 10% tax, whereas short-term capital gains have 15% tax applicability on equity funds.
Whether switching from regular plans to direct or vice versa, investors must always measure the pros and cons of the switch before finalising it. This is because every switch has a direct impact on the overall returns from an investment.
Yes, you can switch your mutual fund investment from a regular plan to a direct plan. Switching is considered as redemption of one scheme. This results in a new investment and therefore may attract certain expenses.
To invest in a direct mutual fund scheme, you can download the Finity app on your smartphone. This app allows access to a wide range of schemes and you can select one as per your risk/return appetite combined with the investment time horizon.
The NAV of a direct plan is generally higher than a regular plan because the NAV of a mutual fund is impacted by the fund’s expense ratio. Since the expense ratio of a direct plan is lower, its NAV is higher than regular funds.
Direct mutual fund plans are generally beneficial for investors since these help in saving on the expense ratios. However, investors have to be prepared to carry out the investment formalities on their own since no middlemen are involved.
There are usually no switching charges applicable while switching between regular and direct plans.