Switching from regular to direct plan of MF

Mutual fund houses offer two options for investing in a mutual fund scheme, namely, Regular and Direct. But most of the mutual fund investors are unaware about these options, and even if they are aware, they do not know the difference between the two.

A regular plan is a plan that is bought through the intermediaries such as brokers and distributors. Since the asset management company (AMC) pays the commission/fee to these intermediaries from the amount invested by the investors, the actual amount invested by the investor gets reduced by the amount of fee/commission paid to the intermediaries. These expenses adversely impact the returns on the investment.

On the other hand, the direct plan is bought by the investor directly from the AMC, so there is no commission or fee payable to any intermediary. This results in saving for the investor as no fee/commission is deducted from the amount invested by the investor. As a result, the expense ratio of the direct plan will always be lower than the expense ratio of the regular plan. Such saving in expenses translates into higher returns for the investor.

To avoid being burdened with higher expense ratio and reaping lower return on MF investment, it is possible for an investor to switch from the regular plan to the direct plan. This can be done by redeeming the investment in regular plan and switching over to the direct plan. Also, investors who are registered online with AMCs or Registrar & Transfer Agents can log on to their websites and place a switch request to convert their regular plan into a direct plan.

Of course, a switch from regular plan to direct plan may have tax implications for the investors as they may be liable to pay short term capital gains or long term capital gains tax on redemption of units. But the STCG or LTCG tax paid by the investor may be more than offset by the benefits of lower expenses on the direct plan over the long term.