How To Switch To Direct Plan From Regular Plan?

6 mins read
by Angel One
Switching from regular to direct mutual funds can save on costs and potentially boost returns. However, it may have tax implications. Read more to enhance your investment knowledge before switching.

Before the start of direct mutual fund plans in 2013, most investors channelled their investments through distributors, advisors, or other third-party avenues. This typically meant that they were investing in the ‘regular’ plan of a specific mutual fund. These regular mutual funds often came with a higher expense ratio, which, in turn, had a negative impact on the returns on investment.a

However, with the rapid expansion of digital outreach and the rise of fintech platforms, investing in the market and mutual funds has become much more accessible. These digital innovations have made it significantly easier for investors to participate in the markets and make mutual fund investments. This has not only simplified the process but has also opened up the possibility of lower-cost options, allowing investors to potentially enhance their returns on investment.

Direct Plans and 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.

Direct Plan:

  • Think of direct plans as the DIY (Do-It-Yourself) option.
  • When you invest in a Direct Plan, you buy mutual fund units directly from the fund house, skipping any intermediaries like brokers or distributors.
  • This plan is cost-effective because it doesn’t include commissions or fees to intermediaries.
  • You generally get a higher return in the long run because you save on these costs.
  • You can invest in a direct plan with online booking platforms such as Angel One.
  • At Angel One, all the funds provided on our platform are offered with direct plans, with zero commissions and zero fees.

Also Read More About What are Direct Mutual Funds?

Regular Plan:

  • In contrast, regular plans involve intermediaries like brokers, financial advisors, or distributors.
  • These intermediaries help you choose and invest in mutual funds, but they charge a fee or commission for their services.
  • The expenses associated with Regular Mutual Funds can eat into your returns over time.

Direct plans are for those who want to manage their investments independently to save on costs and potentially earn more. Regular plans are for those who prefer guidance and are willing to pay for professional assistance.

Why Switch From a Regular to a Direct Plan?

Switching from a regular plan to a direct plan primarily revolves around reducing expenses and increasing returns. In simpler terms, it’s about saving more and earning more.

Regular mutual funds involve an intermediary, like a broker or financial advisor, who assists in managing your investments. However, they charge a fee or commission for their services. On the other hand, a direct plan allows you to invest directly with the mutual fund company, bypassing the middleman. Consequently, you avoid paying the extra fees associated with the intermediary.

When you switch to a direct plan, the expenses are lower because there are no commissions or fees to be paid to intermediaries. This means more of your money is actually invested, which can potentially lead to higher returns over time. It’s like cutting out the middleman and saving that extra money for yourself.

So, the main reasons to switch to a direct plan are:

  • Cost Savings: You keep more of your money as you don’t have to pay fees to intermediaries.
  • Higher Returns: With lower expenses, your investments can grow more efficiently. Over time, this can translate into higher returns on your investments.
  • Transparency: Direct plans are more transparent about their costs, making it easier to understand where your money is going. This transparency empowers you to make better financial decisions.
  • Control: Switching to a direct plan puts you in greater control of your investments. You can make informed decisions without the influence of intermediaries.
  • Long-Term Benefits: The savings you accumulate over time in a direct plan can compound, leading to a significantly larger nest egg in the future.

Let’s take an example to understand the difference between the two plans:

For instance, you invested ₹8,00,000 in the XYZ Fund with direct and regular plans.

Assuming,

  • Expense Ratio of the direct plan: 0.50
  • Expense Ratio of the regular plan: 1.50

Assuming, the XYZ fund will provide an annualised return of 10%, regardless of the plan.  You continued to stay invested for 4 years in the same funds with a growth strategy.

Usually, expense ratios are deducted daily, reducing the expense ratio from the returns generated.

So, here the returns generated from the direct plan will be 10%-0.5% = 9.5%

Similarly, returns generated from the regular plan will be 10%-1.5% = 8.5%

Let’s take a look at the investment schedule and the total returns 

Years  Total Invested Amount (₹)   Total Returns After Expense Ratio (₹)  Total Expenses Deducted Over the Year (₹) 
Direct Plan Regular Plan Direct Plan (9.5%) Regular Plan (8.5%) Direct Plan (0.5%) Regular Plan (1.5%)
1st Year 8,00,000 8,00,000 76,000 68,000 4,000 12,000
2nd Year 8,76,000 8,68,000 83,220 73,780 4,380 13,020
3rd Year 9,59,220 9,41,780 91,125.9 80,051.3 4,796.1 14,126.7
4th Year 10,50,345.9 10,21,831.3 99,782.86 86,855.66 5,251.73 15,327.46

As in the above example, if you would’ve invested in a regular plan. You will miss a return of ₹28,514.6

Note: In the above example, exit load and taxes are not considered. Please conduct a thorough analysis of your investment expenses before investing.

Things to Consider When Switching From 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:

  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • Regular Review: Commit to periodically reviewing your direct plan investments. Staying updated on the performance and market conditions will help you make informed decisions.

Best Direct Mutual Fund Schemes You Can Invest in 2023

Name Sub Category AUM (in ₹ crore) CAGR 3Y Expense Ratio
ICICI Pru Bharat 22 FOF FoFs (Domestic) – Equity Oriented 282.37 45.46 0.08
Tata Small Cap Fund Small Cap Fund 6,134.53 42.03 0.31
Motilal Oswal Nifty Smallcap 250 Index Fund Index Fund 436.98 34.68 0.36
Motilal Oswal Nifty Midcap 150 Index Fund Index Fund 1,003.06 32.81 0.3
Kotak Emerging Equity Fund Mid Cap Fund 33,091.23 32.17 0.37
Kotak India Growth Fund-Sr 4 Multi Cap Fund 111.17 30.68 0.34
ITI Small Cap Fund Small Cap Fund 1,649.71 27.69 0.24
Navi Large & Midcap Fund Large & Mid Cap Fund 270.21 26.48 0.35
Nippon India Quant Fund Thematic Fund 41.09 24.07 0.38
ICICI Pru Passive Strategy Fund FoFs (Domestic) – Equity Oriented 115.94 23.54 0.13
PGIM India Flexi Cap Fund Flexi Cap Fund 5,816.45 23.39 0.39

**All data as of October 12, 2023.

Selection Criteria: The funds chosen have demonstrated the highest Compound Annual Growth Rate (CAGR) over the past three years and the lowest expense ratio with a direct plan.

Should You Switch From a Regular to 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. This means that if you are an astute investor, someone with a keen interest in finance, direct funds should definitely be on your radar.

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.

How to Switch From Regular to Direct Plan?

Investors who initially purchase fund units directly from a fund house may face challenges when it comes to portfolio management. Some of these investors may prefer a more streamlined approach to managing their investments. For them, transitioning from direct to regular funds can be a sensible choice. With a modest additional fee, a distributor or agent can provide valuable assistance in managing their investment portfolio.

The process of switching from a direct plan to a regular plan essentially depends on the broker, or the AMC you’ve been associated with. You can contact the broker or the AMC directly to know about the direct plan for the fund schemes.

Also Read More About Direct vs Regular Mutual Fund

Since Angel One does not offer regular plans for any mutual fund scheme. We do not have a switch option for regular funds. But you can start investing in direct funds in just 5 minutes. To start your direct investment journey with zero commissions, open your demat account today.

FAQs

Is switching mutual funds from regular to direct taxable?

Switching from regular to direct mutual fund plans is considered a taxable event. It’s treated as a ‘transfer’ under Section 2(47) of the Income Tax Act, 1961. This means it may be subject to capital gains tax.

Can I switch ELSS mutual funds from regular to direct plans?

Yes, you can switch from the regular plan of an ELSS mutual fund to the direct plan after the mandatory 3-year lock-in period. This lock-in period means you can’t switch or redeem your investment before 3 years.

Are there charges for switching mutual funds?

Most fund companies do not impose penalties for switching mutual funds. However, if you invest in an equity fund and redeem it within a year, they may apply an exit load. Debt funds typically do not charge such fees for switching.

What are the disadvantages of direct mutual funds?

Direct mutual funds offer lower expense ratios, which can lead to higher returns compared to regular plans. However, they require investors to manage their investments independently, lacking the advice and services provided by intermediaries in regular plans.