How to change the Regular plan to the Direct plan
A regular plan is a mutual fund option that is purchased through intermediaries such as brokers, financial advisers, banks or distributors. A commission is charged by the distributors and brokers for handling the paperwork and providing investment advice, which is deducted from the investors’ return and included in the scheme’s expense ratio.
A direct plan is a mutual fund option that invests directly from the asset management companies (AMCs) without the involvement of any intermediaries or distributors. Although the underlying asset may be similar, because there is no distributor’s commission involved in it, it directly impacts the overall return earned by investors.
The process of switching a regular plan to a direct plan involves redeeming the regular plan investments and reinvesting the proceeds into a direct plan in the same scheme. Although the investment portfolio remains similar, the conversion of a regular plan to a direct plan cannot be changed with a simple request. Since both plans are treated differently, the switching can affect the capital gains and exit load expenses.
Regular plan vs Direct plan: Key differences Investors must know
Let’s understand the differences between a regular plan and a direct plan that investors must consider before making any investment decision.
| Basis | Regular plan | Direct plan |
| Purchasing route | Purchased through distributors, brokers, or advisers | Purchased directly from the AMC website or the investment platform or application |
| Expense ratio | High because of commission and brokerage fee | Low because no commission involved |
| Returns | Low because of comparatively higher expense ratio | High because savings from expenses are reinvested in the fund |
| Long-term returns | Lesser due to compounding effect of higher fee | Higher due to zero distribution fee |
Although the underlying portfolio remains similar, the difference lies primarily in the expense ratio. As direct plans do not have brokerage or distributor fees, they enable investors to create wealth from the accumulated savings from their expenses.
Why Investors prefer Direct plans over Regular plans
Many investors prefer a direct plan over a regular plan in mutual funds primarily because of a low expense ratio. However, there are a few more advantages that attract investors towards a direct plan option. They are mentioned below.
- Low expense ratio: A direct plan does not involve intermediaries, such as distributors, brokers, banks or agents, resulting in no brokerage charges or distributors’ fees. Since there is no distributor’s commission, it leads to a lower total expense ratio (TER) and helps investors to reinvest the saved expense amount into the fund.
- Higher returns: Since a direct plan has a low expense ratio, the saved expense remains invested in the fund. This leads to more accumulation of reinvestment and higher returns on their investment due to compounding. This may result in higher net asset value (NAV) and higher returns over a long tenure.
- Complete transparency and control: Investors can operate directly with the AMCs. This gives them complete control over their investment decisions. Also, the absence of intermediaries makes it easier to monitor the portfolio independently without any interference from advisors.
Step-by-step process to convert a Regular plan into a Direct plan
The step-by-step process for converting a regular plan into a direct plan is mentioned below.
Step 1: Assess taxes and exit loads: Before initiating the conversion of a regular plan into a direct plan, it is essential to check for any capital gain taxes or exit loads on early redemption. Many funds include exit loads that are charged if the investment is redeemed before a specified period. In equity mutual funds, capital gains taxes may be levied based on the holding period.
Since converting plans is treated as redemption of the investment, it is important to calculate the costs involved to determine if switching plans will benefit the investor.
Step 2: Stop your existing SIPs: If you are investing through a systematic investment plan (SIP), it is preferred to cancel your SIP payments before switching. This will help to prevent any future investments in the regular plan. Investors can cancel the SIP through their broker, distributor, advisor, or the AMC website, based on how the SIP was registered.
Step 3: Initiate the switch: Once the cost assessment and SIP cancellation are over, continue the conversion process by visiting the AMC’s website. Then, investors need to select the regular plan held by them and click the switch option to convert it to a direct plan. Also enter the number of units they want to convert. While requesting to switch, choosing the direct plan of the same fund scheme may maintain consistency in their investment strategy.
Step 4: Confirm transaction: Once the request has been submitted, investors can verify the confirmation notice sent by the AMC and check for any mismatches in the transaction details. They can review their portfolio to ensure that the conversion has been made without any discrepancies. They may also start a new SIP to maintain consistency of investment.
Step 5: Track your portfolio: Investors can regularly monitor their portfolio and observe whether their financial goals align with the direct plan option. Consistent monitoring of the portfolio provides information regarding fund performance and helps investors make informed investment decisions for long-term wealth building.
Things to check before switching to a Direct plan
- Exit loads: Many fund schemes charge an exit load if investments are redeemed before a specified period. Investors may evaluate the charge and wait till the load period to avoid unnecessary charges.
- Lock-in period: This represents the minimum period an investor must hold their investment in a mutual fund scheme. The lock-in period may prevent them from redeeming their investments. Therefore, investors need to check for any lock-in period in their regular plans. Some categories, such as ELSS, have a lock-in period. Other open-ended schemes may not have a lock-in, but exit load rules may still apply.
- Capital gain tax: A conversion from regular plans to direct plans is treated as a redemption. Therefore, investors must check for the capital gain tax applicable to their investment. To reduce tax effects, investors can switch into direct plans in instalments.
- SIP continuity: A regular plan SIP cannot be switched directly into a direct plan SIP. In order to maintain regular SIP investments in a direct plan, investors must cancel the regular plan SIP and register for a new direct plan SIP.
- Portfolio management: Converting into a direct plan will result in no advisory body to support investment decisions. The investor has to make necessary decisions based on their own knowledge and management skills. Therefore, reviewing and monitoring the portfolio regularly will provide them with insight into understanding the fund’s performances and making decisions to align with their financial goals.
Benefits of Switching from Regular to Direct Plan
There are a few benefits to switching from a regular plan to a direct plan. They are mentioned below.
- Low investment cost: No intermediaries result in no commission charge for distributors or brokers. This leads to low expense cost and reduces overall investment cost.
- Compounding effect: The expense saved after converting into direct plans is reinvested in the investment, allowing it to accumulate and generate more returns due to the compounding effect.
- Improved transparency: Monitoring the investment through the AMCs website by themself improves the transparency and does not involve any advice from the intermediaries.
- More control: Absence of intermediaries allows investors to make their investment decisions independently and hold control over their own investments without any interference or advice from distributors’ knowledge.
Common Mistakes Investors Make While Switching Plans
There are several mistakes that an investor makes while converting from a regular plan to a direct plan. Some of them are mentioned below.
- Ignoring tax liability: Investors often fail to notice the tax liability imposed during the redemption of an investment. They forget that the redemption of investments affects the capital gains tax.
- Overlooking exit loads: Redemption of investments before a specified period often comes with exit loads. Ignoring the exit load charges will hamper the additional amount available for reinvestment in the direct plan.
- Forgetting to resume SIP: Many investors forget to restart a new SIP in the direct plan after cancelling the regular plan SIP. It is important to maintain consistent SIP payments to fulfil their financial goals.
- Switching without purpose: Switching a regular plan into a direct plan without a purpose might hamper the performance of an investment. Only focusing on expense reduction may not be beneficial if the fund’s performance is poor.
Final Thoughts
Switching from a regular plan to a direct plan allows investors to reduce their expense ratios and increase returns through compounding effects. However, the process of converting is not simple. Investors need to redeem their investment from the regular plan and reinvest in a direct plan of the same fund scheme.
Investors must go through various factors, such as the tax liability, exit loads, SIP continuity, and lock-in period, before going through the process of conversion to a direct plan. Although it provides benefits like a low expense ratio, high NAV, more transparency and control, many investors often make a few mistakes, such as overlooking exit loads, ignoring capital gain tax, not resuming SIPs, and converting without an objective or purpose.
FAQs
No, conversion of a regular mutual fund plan into a direct plan includes a process where the investment is redeemed from the regular plan and then reinvested into a direct plan of a fund scheme.
Not necessarily. However, exit load, taxes, or market movement during the switch may reduce the amount reinvested in the direct plan.
A direct plan allows investors to take control of their investment completely. Therefore, a beginner may have very limited knowledge to make investment decisions on their own.
Direct plans have relatively low expense costs, which may increase the long-term return by 0.5% to 1% annually compared to a regular plan.
No, SIPs cannot be transferred from a regular plan to a direct plan. They are generally cancelled in the regular plan and then restarted in the direct plan.
Direct plans are better for experienced and skilled investors who can control their investments and want to eliminate intermediaries. On the other hand, a regular plan is a good option for beginner investors who have limited knowledge of the industry and seek guidance from advisors.
