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.
The only difference between the two is that in case of Regular plan your AMC (Asset Management Company) or mutual fund house pays a commission to your broker as distribution expenses or transaction fee out of your investment, whereas in case of Direct plan, no such commission is paid. Instead, in case of direct plans the commission is added to your investment balance, which thereby reduces the expense ratio of your mutual fund scheme and increases your return over the long-term.
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 mutual fund scheme rather than the regular plan as with the direct plan the investor gets a comparatively lower expense ratio and also get higher returns due to reinvestment and compounding of amount which gets paid as commission in regular mutual fund plans.
How to switch from Regular to Direct Plan of a Mutual Fund Scheme?
1. Online Mode
This system will vary from one platform to another. Note that this switch is treated as a redemption from the regular plan. Hence, on many platforms, you will have to select the ‘redeem funds’ option and then place a purchase order for the direct plan after the money is credited to your account.
Some other platforms may give you the option to switch as stated below. However, note that for tax and exit load purposes, such a switch is actually a redemption and fresh purchase.
Step 1: Login 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 ‘Switch to Direct’ option available on the page.
Step 5: Click on ‘Confirm’ button and you are done. Now whenever you will visit the ‘Dashboard’, you will find the word ‘Direct’ written against it.
2. Offline Mode
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 is not available, 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.
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-end schemes cannot be switched from the current scheme to a new direct mutual fund unless the lock-in period of the scheme has ended.
- 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 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 as 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
Here is a list of 10 Direct Mutual Fund Schemes
|Fund Name||NAV||AUM (Cr)||1 Year||3 Year||5 Year|
|DSP Equity Opportunities Fund – Growth||225.51||5720.56||-0.78%||8.24%||10.68%|
|SBI Bluechip Fund – Growth||31.51||5745.63||6.60%||13.81%||11.14%|
|ICICI Prudential Bluechip Fund – Growth||43.29||22182.14||-2.57%||9.20%||9.26%|
|ICICI Prudential Equity & Debt Fund Direct – Growth||139.88||26036.43||0.28%||8.87%||10.33%|
|L&T India Value Fund – Growth||35.48||8404.03||-7.69%||7.51%||10.96%|
|SBI Magnum MultiCap Fund – Growth||50.86||7582.94||1.57%||9.88%||12.24%|
|L&T Tax Advantage Fund – Growth||52.94||3420.69||-9.12%||7.26%||8.73%|
|Motilal Oswal Multicap 35 Fund – Growth||26.53||13634.94||-3.61%||9.11%||14.59%|
|Aditya Birla Sun Life Tax Relief 96 – Growth||31.42||8912.66||-8.90%||8.73%||11.38%|
|Mirae Asset Emerging Bluechip Fund – Growth||55.37||7616.5||3.52%||13.26%||16.45%|