How to Switch From Regular Plan to Direct Mutual Funds?

Mutual fund investors often start out with regular plans, purchasing units through intermediaries or distributors, who earn commissions. Over time, many discover that a direct plan charges lower fees, potentially enhancing net returns. But how to switch from regular plan to direct mutual funds? This article talks about what is direct plan versus what is regular plan, highlighting the potential benefits of migrating and the steps needed to switch from a regular to a direct plan easily.

By the end of this piece, you’ll know how to make this transition while considering important factors for your overall mutual fund portfolio.

• Table of contents

• Defining direct plans
• Explaining regular plans
• Difference between direct plans and regular plans
• Why switch from a regular to a direct plan?
• How to switch from regular to direct plan
• Is the conversion right for you?

Defining direct plans

A direct plan is a version of a mutual fund purchased without intermediaries such as brokers or distributors. Because no commissions go to third parties, expense ratios remain slightly lower. This difference can accumulate into relatively better returns over the long term. Moreover, direct plans still provide all the same underlying investments and management expertise as the regular variant, just at marginally reduced costs.

Investors typically access direct plans through the AMC's official website, RTA (Registrar and Transfer Agent) portal, or certain online platforms dedicated to direct funds.

Explaining regular plans

In a regular plan, the fund unit is bought via a distributor, broker, or relationship manager. This professional likely recommends schemes, processes paperwork, and offers advisory services, receiving commissions from the AMC. As these fees come out of the fund’s expenses, the annual charge for a regular plan is marginally higher than its direct counterpart.

For investors who appreciate one-on-one advice, shelling out a little extra for a regular plan may be worth it. But for those who are willing to educate themselves or conduct transactions online, the cheaper direct route might be preferable.

Read Also: Direct vs Regular Mutual Fund: What’s the difference?

Difference between direct plans and regular plans

The main difference between direct plans and regular plans centres on:

• Expense ratio: Direct funds typically feature lower annual expenses. With time, these savings can potentially enhance net returns.
• Distribution: Regular plans pay commissions to distributors, filling the gap between investor and AMC. Direct is simply between you and the AMC.
• NAV variation: Since direct plans are cheaper, their NAVs can be slightly higher than the parallel regular plan.
• Investor effort: Going direct requires that you do your own research, while in an ordinary plan you might rely more on the advice of the distributor.

Why switch from a regular to a direct plan?

Most often, it is to save on recurring costs:

• Reduced fees: Over decades, cost savings compound to bring relatively better net returns.
• Transparency of relationship: You have a direct relationship with AMC or approved RTA channels.
• DIY method: Some enjoy taking charge of their online transactions, bypassing the need to rely on distributor tips.
• Long-term returns: Even a 0.5% or 1% annual difference in expense ratio can potentially yield a noticeable boost in the final corpus.

Rationale for the move

• Cost efficiency: If you handle your own research and don’t rely heavily on third-party counsel, the direct route saves money.
• Digital platforms: The rise of user-friendly online portals means picking or switching to direct funds is simpler than ever.
• Transparent fee structure: The AMC’s fees remain visible, with no hidden commissions.

How to switch from regular to direct plan

This procedure typically proceeds as follows:

1. Redemption/transfer approach:
   • Redeem your units in the regular plan. Then reinvest the proceeds into the direct plan of the same scheme (or a different scheme).
   • Alternatively, certain AMCs might offer a direct switch facility, but not all do. You might have to do the two-step process.
2. KYC recheck: If you’re shifting to direct directly on the AMC site or aggregator platform, confirm that your KYC status is up to date.
3. Capital gains implications: A switch from regular to direct is typically treated as selling and buying. For equity funds, short-term or long-term capital gains tax might apply. For non-equity funds, older rules might or might not apply, depending on the type of fund and recent tax changes.
4. Exit load: If your scheme imposes an exit load within a specific holding period, you may have to pay this cost. Verify if your units have passed that time threshold.

Read Also: SIP Plan for 5 Years: How to Invest, Benefits & Key Tips

Is the conversion right for you?

• Holding period: If you’re well past any exit load period, the cost to switch might be minimal. But if you’re still within that period, weigh the load and potential tax vs. future fee savings.
• Investment horizon: If you plan to hold for many more years, switching sooner might enhance expense savings.
• Advisory dependence: If your distributor actively manages or helps you with broader financial planning, you might value that service. But if not, switching may be beneficial.

Practical tips

• Time the switch: Doing so during a bull phase might yield capital gains tax, but if you see favourable returns ahead, offsetting that cost might be worth it.
• Partial switch: You can switch only a portion of your holdings if you’re uncertain or want to maintain a relationship with your distributor for some curated picks.
• Avoid frequent trades: Switching can cause repeated short-term capital gains events. Keep your strategy stable to minimise potential taxes.
• Check AMC platforms: Some AMCs simplify the switching process within their own ecosystems, avoiding complete redemption.

Conclusion

Shifting from regular plan to direct mutual funds can generate significant long-term cost savings and net higher returns, particularly for independent investors who are comfortable with research and online transactions. Knowing what is direct plan and what is regular plan lays the groundwork for understanding how expense ratio differentials add up over time. Though switching from an ordinary plan to direct usually results in a redemption and fresh purchase, subjecting it to taxes and potential exit loads, the benefit from reduced annual charges continues to appeal to many investors. Ultimately, linking this with broader mutual fund portfolio construction can ensure you maintain professionalism while reducing recurring distribution charges. If you’re confident in your ability to choose and track funds, transitioning to a direct plan can be a strategic shift for your long-term wealth-building journey.

FAQs:

Which one is better, a regular or direct mutual fund?

A direct fund typically has lower expense ratios, so potential earnings are slightly higher over the long term. Yet regular funds might package distributor advisory services—worth it if you need a lot of individual advice.

How much time does it take to switch a mutual fund?

It depends. In some instances, a switch request can be completed within a few business days, subject to the AMC's procedures. Redemptions from one platform and reinvestment on a different platform may have short settlement periods.

What is the cost of switching mutual funds?

Primary costs include exit loads if applicable, plus any capital gains tax triggered by redemption. Some AMCs might charge nominal fees for switching, but many provide it free if done within the same AMC. Always confirm specifics with your fund house or platform.

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