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Here is how to switch MF investments from regular plan to direct plan

We will explain not only how, but also why and when it is wise to switch your investments from regular plan to direct plan.

July 11, 2017 / 09:27 AM IST

Anupama Telang

SEBI – the regulator for stock markets, got mutual fund houses to launch direct plans of all mutual fund schemes in 2013. This means every mutual fund plan has two types, one, regular plan which includes commission charges paid out to brokers and second, direct plan which is devoid of such commission costs. Thus, the only reason to switch from regular fund to direct fund is to save commission costs and marginally increase your returns. We will explain not only how, but also why and when it is wise to switch your investments from regular plan to direct plan.

Why switch to direct mutual funds?

Direct plans are bought directly from the fund house, bypassing the distributor. The savings on agent’s commission are passed on to investors in the form of lower expense ratio. Thus, everything remaining the same, the returns of direct plan of a fund will be slightly higher by up to max 2 percent than that of a regular plan.

Switching should be done only when investor knows that he/she can manage funds on their own and feels that the distributor is not entitled tp a part of earnings in the form of trail commission or when one gets complete hand-holding from a fee-only financial advisor to manage and review funds.


How to switch?

A. If you are registered for online mutual fund transaction with individual AMCs -

1. Login to your mutual fund account. The account can be either online transaction facility provided by individual mutual fund house or through direct online mutual fund platforms provided by CAMS, KARVY, MF Utility etc.

2. Go to transaction page which allows you to purchase/switch/redeem fund. Choose the switch option and select from the ‘switch from’ drop-down the fund name you want to switch.

3. Select the same fund name in the ‘switch to’ option and make sure the fund name has ‘Direct Plan’ written at the suffix.

4. Re-login after four days to check if the switched investments have ‘Direct Plan’ as suffix.

B. If you don’t want online access -

1. Visit the mutual fund office.
2. Ask for common transaction - Switch form.
3. Fill in the required details with folio no. and the right fund name.
4. Sign and submit the same.

5. You will receive an account statement to your registered email id after the switch is processed.

C. If you are registered through broker/ distributor /demat form

The switch to direct fund won’t be possible if investor has transacted from online platforms such as ICICI Direct, Funds India, Birla – Myuniverse etc. or held mutual fund in demat form. One needs to activate online transaction at individual AMCs OR process it offline through forms. Both the ways are explained above.

When to switch?

Switch should be made only when the investments are to be done are long term investments i.e more than five years and is a considerable amount. For example, Rs 1 Lakh if invested for 3 years which gains return of 9.5 percent under regular plan and 10 percent under direct plan, there would be an additional gain of only Rs 1800 under direct plan. But if Rs 20 Lakh is invested for 20 years with the same return, direct plan would earn Rs 11.71 Lakh more at the end of the term as compared to a regular plan.

Even though the fund value is switched to the same fund, such transaction is considered as selling of old investment and buying new ones and would be charged accordingly. Two main costs involved are to be considered while switching to direct plan.

a) Exit load – Exit load is the charge of redeeming the mutual fund prior to the ideal fund investment horizon. For equity-oriented funds, this is typically charged as 1 percent of the redemption value if redeemed before one year of investment and no exit load thereafter. For debt oriented funds, the exit load ranges from 0-2 percent and depend on the type of fund. Thus, to avoid such charges, one must ensure that the fund has no exit load or hold on to the fund till there is no applicable exit load.

b) Taxation – Switching funds will have tax implications which are as per regular capital gain taxation. Which means, in case of equity funds, the investments if switched after 1 year of holding the investment are tax-free and if done prior, the gains will get taxed at 15 percent. In case of debt funds, short-term gains i.e. of less than three years holding period will be taxed according to the tax slab and if switched after three years of holding, the gains will be taxed at 20 percent with indexation benefit.

In case an investor wishes to switch current SIP investment in to a direct plan, the investor needs to stop the SIP and restart it in a direct fund. It is recommended that the accumulated amount should be switched only if there is no exit load or tax involved. In case of an equity fund, one can wait for a year and then switch the accumulated fund as there would be no exit load nor taxation expense involved. Investor can verify if fund has been switched to direct once the new account statement has ‘Direct Plan’ written as a suffix to the fund name.

Switching to direct plans make sense when an investor themselves track and invest in portfolio and are not dependant on distributor. Also, it is important to communicate with your advisor if you have a considerable investment in your long-term portfolio. A genuine financial advisor will surely promote and help you with the process of switching to direct plan if he/she places client’s interests first.

(The writer is Certified Financial Planner at finpin)
first published: Jul 10, 2017 03:12 pm

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