As a few investors may have unintentionally invested into regular plans and would like to shift to direct plan option to earn higher returns, we take a look at how they can shift from a regular to direct plan.
A Direct Plan and a Regular Plan of a mutual fund are two different investment modes into the same scheme, investing in the same stocks and bonds, but with one major difference, ie, direct plans usually have higher returns. Prior to January 2013, there was a single plan structure for all investors.
Then, the Securities and Exchange Board of India mandated fund houses to offer two type of plans: 1) direct plans for investors who want to directly purchase mutual funds from fund houses rather than going through the distribution channel, and 2) regular plans, or the original format of schemes, sold through the distribution channel involving national distributors, banks, independent financial advisors, aggregators, demat account and other digital channels.
A Regular Plan is one in which the Mutual Fund Company pays the broker/advisor a hidden percentage of commission every quarter. This commission is factored into the higher expense ratio of Regular Plans. Apart from the expense ratio, the schemes will also have a different NAV and returns. “This savings in expense ratio (in case of Direct Plans) is added to the returns of the scheme – and passed on to you, the customer, in the form of a higher Net Asset Value (NAV) each day! And so the NAV of Direct Plans is relatively higher than Regular Plans,” Kunal Bajaj, the CEO of Clearfunds.com observes in a blog post. As a few investors may have unintentionally invested into regular plans and would like to shift to direct plan option to earn higher returns, we take a look at how they can shift from a regular to direct plan.
Login to the respective mutual fund account. Visit the transactions page which allows you to purchase/switch/redeem fund. Choose the switch option and select from the ‘switch from’ drop-down the fund name you want to switch. Select the same fund name in the ‘switch to’ option and make sure the fund name has ‘Direct Plan’ written at the suffix. The Switch to direct funds should be compete in four working days, and the investors will be updated of the same.
It is to be noted that when the investor switches from regular to direct, such transaction is considered as selling of old investment and buying new ones and would be charged accordingly. Hence, the investor will be charged exit load which is generally 1 percent of the redemption value if redeemed before one year of investment and no exit load thereafter in case of equity schemes. For debt oriented funds, the exit load ranges from 0-2 percent and depend on the type of fund.
Secondly, the investors will also have to consider tax implications. In case of debt funds, short-term gains i.e. of less than three years holding period will be taxed according to the tax slab and if switched after three years of holding, the gains will be taxed at 20 percent with indexation benefit. In case of equity funds, the investments will be taxed at 15% i8f done within a period of one year, nil after that.
Most notably, direct funds have outperformed their regular peers since inception. “The annualised returns have been 23.83% in the direct plan and 22.94% in the regular plan. That doesn’t look like much. However, over the years, an investment of Rs 1 lakh would grow to Rs 2.53 lakh in direct and Rs 2.45 lakh in regular. That’s an extra Rs 8,000 on Rs 1 lakh in four and a half years,” Dhirendra Kumar of Value Research said in a recent article published on the website.