Mutual funds are considered to be one of the primary instruments that bring about a semblance of safety and security in an economically volatile environment. Not only do they provide the benefits of diversification, but they also ensure that an investor’s portfolio remains productive and sustainable throughout the investment tenure. This is precisely why it comes as no surprise that most people are increasingly relying on mutual funds as a vehicle to take calculated risks and reap long-term rewards.

However, unlike earlier times, mutual funds are not a single-bred platform anymore. The securities and exchange board of India (SEBI) brought significant changes to the mutual fund market in January, 2013 by directing all fund houses to make sure that the schemes they launch have two principal forms- Direct and Regular. Under the direct mutual fund plan, a scheme can be purchased by a customer directly, without the involvement of any third-party. This means that an investor can avoid paying the broker’s commission charges and thus, save money owing to a reduced expense ratio. On the other hand, under the regular plan, an intermediary need to be necessarily involved. This results into a higher expense ratio and thereby, lower profits.¬†

Going by the benefits associated with a direct mutual fund plan, a lot of investors have gradually begun to change from one fund type to another. As an investor, if you too are willing to switch from a regular mutual fund plan to a direct mutual fund plan, here is what you need to do:

How to Switch from Regular to Direct Mutual Fund Plans?

The process of switching from regular to direct mutual fund plans can be undertaken in two major ways. These include:

A. Online Registration

If you perform fund transactions with asset management companies online, you must:

  • Log in to the mutual fund account which you have created on their website.
  • Directly go to the web page which carries the ‘Purchase’ or ‘Redeem’ button.
  • Look for the ‘Switch’ tab and click on it.
  • A drop-down menu will appear, asking you the name of your current fund plan and the name of the fund plan you intend to change into.
  • Choose the same fund’s name on both sides and select the ‘Direct Plan’ suffix.
  • Carefully check the changes you have made and click on the ‘Submit’ button.
  • Log in to your account again after 3 to 4 days. By now, your request would have been processed and the regular plan would have been switched to a direct plan.

B. Offline Registration 

If you transact with asset management companies on a personal basis, you will have to physically visit their branch office where you must:

  • Ask for the ‘transaction switch’ form to be handed over to you.
  • Fill it in with details like name, address, identity, portfolio number, and fund name.
  • Duly sign the form as a measure of authentication and submit it.
  • Once this has been done, the switch will be performed within 7 to 8 working days, after which you will be informed about it on your registered e-mail id.

Apart from the aforementioned, there are a few other things which you need to bear in mind before going ahead with processing the switch:

  • An instant switch to direct funds would not be possible if you have been making transactions via brokers and distributors. It would also be unviable to do so if you hold mutual funds in a DMAT form. Therefore, in such cases, you must activate your online account by approaching the individual asset management companies or by physically visiting their branch.
  • If you are invested in a Systematic investment plan (SIP) and want to convert it into a direct plan, you will have to exit the SIP and restart it as a direct mutual fund. However, when you receive your first account statement, make sure that you verify whether the switch has been made by checking if the fund’s name has ‘Direct’ written next to it or not.
  • Make a detailed study of the exit load and taxation changes which you might have to incur while making the switch. For instance, an equity mutual fund will not be taxed for the first year, but after this period is over, it will attract a long-term capital gains tax of 10%. Thereby, it would be wise to process the switch within the first year itself instead of holding the fund for a longer term.

At this juncture, it becomes extremely important to find out what is the right time to make the switch from regular to direct.

What Is the Right Time to Switch?

Facilitating a switch usually makes sense if you have to invest a large amount of money for a considerable period of time. This can be better explained with the help of an example.

Let us consider that you are willing to invest Rs. 1,00,000 for a tenure of 3 years at an interest rate of 9.5% (Regular plan) and 10% (Direct Plan). In such a scenario, your overall earnings under direct plan would only be Rs. 1,800 greater than their regular counterpart. On the other hand, if you are willing to invest a sum of Rs. 20,00,000 for a period of 20 years at the same interest rates, the overall earnings under direct plan would be about Rs. 11 lakhs greater than a regular plan!

This is why the corpus to be invested and the expected investment tenure should always play the primary role in helping you determine when to switch from one form of mutual fund plan to another.

Categories: Finance