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Most mutual fund investors today begin with regular plans, which include distributor commissions and therefore carry a higher expense ratio. These additional costs reduce overall returns. One way to avoid this is by switching to a direct plan. With direct plans, there are no intermediary charges, lower ongoing costs, and better chances for investors to retain more of their returns. The rise of digital platforms and easy access to financial tools has made choosing direct plans a better choice, and you can easily switch to one in a few simple steps.
Key Takeaways
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As there is no distribution commission in direct mutual fund plans, they have low expense ratios, which can lead to better overall returns.
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Regular plans involve intermediaries that charge fees, which can reduce overall gains as your expenses rise.
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Switching from a regular plan to a direct plan may be beneficial, but it involves tax implications, exit loads, and active portfolio management.
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With direct investments, one gets better control, transparency, and long-term cost savings.
Direct Plans Andand Regular Plans
Direct and regular plans are two options you can choose when investing in mutual funds. These plans have some key differences, and understanding them can help you make a more informed investment decision.
What Are Direct Mutual Fund Plans?
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Think of direct plans as the DIY (Do-It-Yourself) option.
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When you invest in a direct plan, you buy mutual fund units directly from the fund house, skipping any intermediaries like brokers or distributors.
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This plan is cost-effective because it doesn't include commissions or fees to intermediaries.
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You generally get a higher return in the long run because you save on these costs.
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You can invest in a direct plan with online booking platforms.
Also, read What are Direct Mutual Funds? here
What Are Regular Mutual Fund Plans?
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In contrast, regular plans involve intermediaries like brokers, financial advisors, or distributors.
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These intermediaries help you choose and invest in mutual funds, but they charge a fee or commission for their services.
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The expenses associated with Regular Mutual Funds can eat into your returns over time.
Direct plans can be ideal for those who want to manage their investments independently and lower expense ratio. Regular plans are for those who prefer guidance and are willing to pay for professional assistance.
Difference Between Direct Andand Regular Fund
Understanding the difference between direct and regular fund is essential for choosing the right mutual fund strategy. Each option affects your costs, returns, and level of involvement as an investor. Below is a simple comparison to help you decide.
|
Feature |
Direct Fund |
Regular Fund |
|
Intermediary Involvement |
No intermediaries; You invest directly with the AMC |
Involves brokers/advisors who assist you |
|
Expense Ratio |
Lower, as no commissions are included |
Higher due to distributor commissions |
|
Returns |
Typically higher over the long term |
Slightly lower due to added costs |
|
Control |
Full control; suitable for DIY investors |
Guided approach with professional support |
|
Cost Efficiency |
More cost-effective |
More expensive |
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Transparency |
Clear visibility of costs |
Costs embedded in commissions |
|
Best For |
Informed, self-managed investors |
Beginners or those preferring expert help |
Why Switch Fromfrom a Regular Tto a Direct Plan?
Switching from a regular plan to a direct plan is mainly about saving more and earning more. Regular plans include brokers or advisors who help you invest—but they charge a commission. This extra cost reduces your returns. Direct plans cut out the middleman, so you invest directly with the fund house and avoid paying any commission. As a result, a bigger portion of your money actually gets invested, helping your wealth grow faster over time.
Here’s why many investors switch to direct plans:
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Cost Savings: No distributor commissions mean you keep more of your money.
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Higher Returns: Lower expenses can allow your investment to grow over the long term.
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More Transparency: You clearly see what you’re paying for.
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Greater Control: You take charge of your own investment decisions.
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Long-Term Benefits: Even small yearly savings compound into significantly higher wealth.
Simple Example
Let’s say you invest ₹8,00,000 in the same fund, with both a direct and regular plan.
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Direct plan expense ratio: 0.50%
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Regular plan expense ratio: 1.50%
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Fund return: 10% annually (same for both plans)
After deducting expenses:
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Direct plan earns: 9.5%
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Regular plan earns: 8.5%
Over 4 years, here’s how your money grows:
|
Year |
Direct Plan Value (₹) |
Regular Plan Value (₹) |
|
1 |
8,76,000 |
8,68,000 |
|
2 |
9,59,220 |
9,41,780 |
|
3 |
10,50,345.9 |
10,21,831.3 |
|
4 |
11,50,128.76 approx |
11,08,686.96 approx |
Difference in returns:
If you chose the regular plan, you’d miss out on around ₹41,442, just because of higher expenses.
Note: This example ignores taxes and exit loads. Always review costs before switching.
How To Switch Fromfrom Regular To Direct Plan?
The process varies depending on your broker or the Asset Management Company (AMC). You’ll typically need to raise a switch request by contacting the AMC or RTAs directly. You can raise this request through:
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Logging into your account with the broker
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Go to the fund you want to switch and choose the option
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Enter the units you want to switch, which will be redeemed.
You can also choose the offline option and get a form from your broker and submit it. Note that some brokers may not allow you to switch directly. You can contact your broker to know the exact process.
Things To Consider When Switching Fromfrom Regular To Direct Mutual Funds
When transitioning from regular plans to direct plans, there are several important factors to keep in mind. This change can have a significant impact on your investments and financial goals, so it's crucial to make an informed decision. Here are some key considerations to help you navigate this switch:
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Cost Differential: One of the primary reasons for switching to direct plans is the lower expense ratio. You'll pay lower fees, which can lead to higher returns over time. Compare the cost difference between your current regular plan and the corresponding direct plan.
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DIY Approach: Direct plans require you to manage your investments independently. Be prepared to make your own decisions and monitor your portfolio regularly. If you prefer a hands-off approach, regular plans might be more suitable.
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Research and Knowledge: Are you comfortable with researching and understanding the market, fund performance, and investment strategies? Direct plans demand more investment knowledge, so assess your expertise in this area.
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Tax Implications: Switching from regular to direct plans can have tax implications, especially if you've held the investments for a significant period. Consult a tax expert to understand the tax consequences of the switch.
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Ease of Investment: Direct plans are usually available through online platforms and AMC websites. Ensure that the platform you choose is user-friendly and provides the necessary tools for tracking and managing your investments.
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Transaction Costs: Keep an eye on any additional transaction costs associated with buying and selling in direct plans. These costs can vary between different fund houses and platforms.
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Regular Review: Commit to periodically reviewing your direct plan investments. Staying updated on the performance and market conditions will help you make informed decisions.
Should You Switch Fromfrom a Regular Toto a Direct Plan?
In 2013, the Securities and Exchange Board of India (SEBI) made a pivotal move by introducing the 'Direct Plan' for mutual fund investors. This reform revolutionised the way investors who could access these financial instruments. It is widely recognised as a cornerstone reform that significantly changed the mutual fund sector.
The primary allure of direct funds lies in the fact that investors are exempt from paying any commission. Unlike regular funds, where the expense ratio includes advisory charges, direct funds spare investors from this extra cost.
Many individuals choose to rely on external agents for their mutual fund investments, primarily for the sake of convenience. However, if you're financially savvy and prefer to have greater control over your investment decisions, direct funds offer a compelling and cost-effective option.
Things To Know Before Switching Toto Direct Plan
Switching from a regular mutual fund plan to a direct plan is completely possible and has become much simpler with online platforms. However, the switch is treated as a new investment, so it’s important to understand the costs and tax impact before proceeding. Apart from this, here’s what to know before you make the switch:
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Your regular plan units are redeemed, and new units are purchased under the direct plan.
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This redemption may trigger capital gains tax, depending on how long you’ve held the investment.
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An exit load may apply if you switch before the fund’s minimum holding period is completed.
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The NAV of direct and regular plans will differ.
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ELSS funds cannot be switched before the 3-year lock-in.
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Switching is processed within 1–3 working days.
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Always review tax impact, exit load, and whether you want a partial or full switch.
Conclusion
By cutting out commissions and lowering the expense ratio, direct plans help ensure more of your money stays invested and compounds for you. The process itself is straightforward: log in to your AMC or investment platform, choose the fund, select the direct option, and confirm the switch. Just be mindful of taxes, exit loads, and lock-ins before proceeding.