How to switch From Regular to Direct Mutual Fund Plan?

Since the introduction of direct mutual fund plans in 2013, Indian investors have gained access to a more cost-effective way of investing. Historically, investments were largely made through distributors or advisors, leading to the purchase of regular mutual fund plans. These plans included commissions and fees, reducing overall returns. However, advancements in digital platforms and the growing awareness of direct plans have enabled investors to bypass intermediaries, offering greater transparency, control, and returns. If you are wondering how to switch from regular to direct mutual fund, this guide provides a comprehensive overview of the process.

What is a direct plan?

A direct mutual fund plan allows investors to purchase units directly from the fund house, eliminating any intermediary commissions. This cost-saving structure results in a lower expense ratio, directly boosting your returns. Direct plans are ideal for investors confident in managing their own portfolios and seeking long-term financial benefits. For instance, if a fund delivers an annual return of 10%, a direct plan may generate returns closer to 9.5% after expenses compared to 8.5% for a regular plan.

What is a regular plan?

in a regular mutual fund, investors rely on intermediaries like brokers or advisors to facilitate their investments. While these professionals provide guidance, their fees and commissions are embedded in the expense ratio, reducing net returns. Regular plans suit individuals who prefer professional advice or lack the time to monitor their investments. However, the return difference between direct and regular mutual fund plans can be substantial, especially over longer investment horizons.

Why should you switch to direct plan?

Switching from a regular to a direct plan offers multiple benefits:

• Cost savings: Lower expense ratios in direct plans mean more of your money is invested.
• Higher returns: The compounded effect of cost savings over time results in higher wealth accumulation.
• Transparency: Direct plans provide clear information about charges, empowering investors.
• Control: Managing your investments directly offers greater flexibility.

For instance, if you invest INR 8,00,000 in a fund for four years, a direct plan could yield INR 28,000 more than a regular plan, based solely on expense ratio differences.

Eligibility to switch plans

Switching is straightforward for most mutual fund investors, provided the same fund house offers both regular and direct plans for the desired scheme. However, ensure there are no exit load charges or tax implications before initiating the switch.

Step-by-step guide to switching to direct plan

If you are ready to make the switch and are wondering how to switch from regular to direct mutual fund, follow these steps:

1. Review your portfolio: Identify the funds you wish to switch to a direct plan.
2. Use a SIP calculator: If you have a systematic investment plan (SIP), assess how the switch affects your returns.
3. Access AMC website or platform: Log in to the asset management company (AMC) portal or your investment platform.
4. Redeem regular plan units: Initiate the redemption process for your regular plan units. Note any applicable exit loads or taxes.
5. Purchase direct plan units: Invest the redeemed amount into the direct plan of the same fund. Ensure you use the AMC’s website or a direct investment platform.
6. Monitor your investments: Regularly track your portfolio to ensure alignment with your financial goals.

Important considerations before switching

While switching to a direct plan is beneficial, keep the following points in mind:

• Tax implications: Redeeming regular plan units may attract capital gains tax, depending on the holding period.
• Exit load: Some funds impose exit loads if redeemed within a specific timeframe. Check the terms before initiating the switch.
• DIY responsibility: Direct plans require active monitoring and decision-making.
• Platform selection: Ensure the platform used for direct investments is secure and user-friendly.
• Fund performance: Verify that the direct plan matches or exceeds the performance of the regular plan.

Conclusion

Switching from a regular mutual fund to a direct mutual fund is an efficient way to optimise your investment returns. Understanding the difference between regular and direct mutual fund plans is crucial for making informed decisions. By eliminating intermediary fees, direct plans offer a cost-effective route to wealth creation. For those new to the process, learning how to buy mutual fund direct plan is straightforward through AMC websites or digital platforms. Use tools like a SIP calculator to evaluate your potential gains and make the switch confidently. By embracing direct plans, investors can enjoy greater transparency, higher returns, and a hands-on approach to managing their portfolios. Start today and take a significant step towards financial independence.

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