By Dheeraj Agrawal, Communication Professional
Whether you are thinking about investing in mutual funds or you have already invested in it, it is important for you to know why a direct plan can prove to be better. In 2013, mutual fund houses started launching direct plans, after which investors switching from regular plans to direct has increased on a daily basis.
First of all, understand how the direct plan is different from regular. Brokers get some of the money you invest in a regular plan of a mutual fund as a commission. But there is no such commission in the direct plan. So it makes a difference that direct plans of the same scheme of mutual funds get more returns than regular plans.
Why switch from regular to direct plan?
If you study the annual returns of mutual fund plans, you will find that the annual return in the direct plan of each mutual fund is 1-2% more than the regular plan. Actually, direct plans are bought directly from the fund house and there is no broker or distributor in them. Therefore, the broker’s commission is saved and the amount of investment increases, which benefits in the form of higher returns. You may see a slight difference of 1-2% in the annual return, but if an investor is investing continuously for a period of 15-20 years, then this slight difference makes a difference of millions. (See graphics)
Head- small difference, big advantage
Sub- SIP of 5000 for 20 years
38.28 Lakhs at 10% annual return
43.68 lakhs on 11% annual return
The difference of just 1% makes a difference of more than 5 lakh rupees in the amount you get after 20 years. And if the amount of investment is large then this difference will increase even more.
How to switch?
1. If you are registered with the fund house for online mutual fund transactions:
– Login to your mutual fund account.
– Go to the transaction page and choose the switch option.
After this, in the ‘Switch from’ drop-down, choose the name of the fund you want to switch.
After this, go to ‘Switch to’ option and select the direct plan of the same fund.
2. If you do not do online fund transactions:
– Visit the concerned mutual fund office.
– Take the switch form, fill in the folio number and the name of the fund scheme.
– Sign and submit.
If you invest in a mutual fund through a broker or distributor or demat account, you will not be able to switch to direct fund. To switch, you will have to do online transaction by visiting the website of individual mutual funds or fill the form by going to the office of that mutual fund.
Keep these things in mind before the switch:
– Even if you are switching from regular to direct plan of a mutual fund, this transaction will be considered to be redeeming the old investment. Exit load may also be incurred if you are switching before a fixed investment period. For equity funds, there is usually an exit load of 1% for withdrawing investments before one year. In debt funds, exit loads are up to 2%. So it would be better to find out about the exit load before switching.
– By switching, you also come under the ambit of capital gains tax. In the case of equity funds, if switching happens before one year, then you will have to pay 15% tax on capital gains. And, if switching happens after a period of one year, LTCG tax is applicable at the rate of 10% if the capital gains exceed Rs 1 lakh a year, and there is no benefit of indexation.
– In the case of debt funds switching, tax will have to be paid according to the slab on the capital gains made before three years. After keeping more than three years, you will have to pay 20% tax on capital gains along with indexation benefit.
– If the SIP investment is to be switched from regular to direct, then the existing SIP will have to be stopped and SIP has to be started in the direct fund.
Therefore, switch from regular plan to direct plan only when neither you have to pay exit load nor capital gains tax. Only then you will get the full benefit of the difference in the returns of these two plans.
