Why, how and when to switch from regular plan of mutual fund to direct plan

Direct plans are investments made in funds without involving any intermediary such as a distributor, agent, bank, online broker etc. The advantage of the direct plan is that they have lower expense ratio compared to the regular plan. On an average, the difference is up to 1 per cent. What this means is that if a regular plan of a fund has an expense ratio of 2.5 per cent then the direct plan will have an expense ratio of 1.5 per cent. In the long run, this small difference can make a big impact, as much as 20% on your total return and final corpus.

Despite all the benefits of investing in the direct funds, less than one-sixth of the investors in equity funds invest in direct funds. One of the reasons for such apathy towards direct plan is lack of understanding on how to switch from a regular plan to a direct plan. There are various options available to switch your investment plan.

Many of us, who are comfortable using computers, can opt for online options. All you need to do is log on to the websites of Registrar & Transfer Agent (RTA) of mutual funds and fill the required form to make the switch. These RTAs are institutions that register and maintain detailed records of the transactions of investors for the convenience of mutual fund houses. There are primarily two RTAs (Karvy and CAMS) handling records for most of the mutual funds in India. In addition to making switch request through RTAs, you can also visit websites of respective mutual fund houses and can request for a switch.

For those of you who want to initiate the process of switching offline, they can visit the local office of RTAs and fill up the required form and make a request to switch. The process can also be initiated at the nearest branch of your mutual fund company.

Before initiating the process of switching your investment plan from regular to direct, you should understand the exit load and tax implication of such a process.  Every switch is treated as exiting a fund and re-investing of funds, even though the scheme remains the same. Therefore, this may attract an exit load and capital gains tax (if any). Both costs are associated with the holding period of the fund. Exit load for most of the equity funds is 1%, if the holding period is less than one year. Capital gain tax again depends upon the holding period and the type of scheme (Debt or Equity). Therefore, your timing of the switch should be such that it minimizes your cost.