Convert regular mutual fund to direct plan: A regular plan and a direct plan. The regular plan is the one that consists of commission charges that are paid out to brokers and other intermediaries. The direct plan is free from these commission costs. Therefore, the most important reason to convert the regular fund to a direct fund is to save on commission costs.
Whether an investor opts for a regular or a direct plan, he/she will get the same mutual fund scheme, which will be run by the same fund manager investing in the same set of stocks and bonds. However, the difference lies in expense ratios.
In this article, we will delve deep into why investors focus on to convert regular mutual fund to direct mutual funds. By the end of this article, investors will become aware of the process and the things that they need to be wary of.
Direct Plans and Regular Plans
Direct and regular plans are 2 options for purchasing the same scheme of the mutual fund. A direct plan means buying a mutual fund scheme directly from the fund house or the asset management company. Therefore, there will be no involvement of an agent or intermediary as far as the investing process is concerned.
On the contrary, a regular plan is when you invest in a mutual fund scheme with the support of an intermediary or agent. Since in this case, the agent has offered you the services, you are liable to pay the commission costs. In investments through regular plans, the investor pays a commission to the fund house or AMC. Later on, this fund house pays the required amount to the intermediary.
This is the only big difference between these 2 plans. In a regular plan, investors incur higher expenses. This eventually impacts the returns in the long run. Therefore, the returns which are generated on direct plans are higher in comparison to the ones generated in regular plans.
In direct plans, the commission gets added to the investment balance, reducing the expense ratio of your mutual fund scheme. Therefore, this increases the returns over the long term.
Conversion Regular Mutual Fund to Direct Plan- Know the Process
Before planning to convert from a regular fund to a direction of a mutual fund, investors are required to be aware that for most funds this will be considered a redemption from the regular plan. The process and the expenses which the investors will incur during the switching process will be the same as the ones incurred during the redemption of the mutual funds.
Investors can switch from regular to direct plans through online and offline modes.
The online mode for making investments in mutual funds is different for different platforms. If your fund house doesn’t have an option to switch from a regular plan to a direct plan, you need to redeem your funds from the current scheme.
After the redemption amount gets credited to the bank account, you need to place a purchase order, choosing the direct plan, of the same scheme.
However, there are platforms that may allow you the option to switch directly. If this is the case, you are required to follow the given steps-
- Log in to the mutual fund account through which the initial investment was made.
- Visit ‘Dashboard’ or the “Home” page where all of your mutual fund investments are listed.
- Now, select that mutual fund scheme against which the word ‘Regular’ is written.
- Once you click, all the details related to the scheme will be displayed. However, you need to click the option which allows you to switch from a regular to a direct plan.
- Once all the necessary steps are followed, confirm the changes made. The next time you log in, you will find that “Direct” will be written against the scheme in which you have invested.
However, before opting to switch, investors are required to be aware that for tax and exit load purposes, this sort of switch will be considered as an actual redemption of the old scheme and the fresh purchase of the new one.
If you plan to choose an offline mode, switching from a regular to a direct plan will require you to follow the following steps-
- Investors are required to visit the nearest branch of the mutual fund house or AMC in whose scheme they have invested.
- Investors are required to fill out the ‘Switch’ Form. In some AMCs, this option is not available. In such a case, you need to ask for a ‘Redemption’ form.
- Fill in all the necessary details. Once the details are verified, investors should sign and submit.
- A few days later, investors will get the email confirmation that the desired switch has been processed successfully. If investors have redeemed the mutual fund investment, they will have to fill out the fresh purchase form for the direct plan after the money gets credited.
Things to be kept in mind before deciding to Convert Regular Mutual Fund to Direct plan
Regular investments are allowed to be transferred to direct investments only when the lock-in period of the regular units ends. For example, in the ELSS schemes, there are lock-in units. The minimum lock period is for 3 years. Therefore, switching of these units cannot be done until the lock-in period gets over.
Another thing investors are required to keep in mind is the exit load. This is applicable to units of various schemes which belong to various mutual fund categories like equity, debt, etc.
Investors are required to check that the current plan does not feature an exit load. If it does, the application of exit load will reduce the value of the redemption. Therefore, the reduced amount gets invested into the direct scheme.
Investors should also see the switching process from the taxation point of view. Since switching from the regular plan to the direct plan will be considered a redemption, there will be capital gains tax (if any).
Convert regular mutual fund to direct plan will only be beneficial if an investor has the ability and capability to track the investments. This is because, in a direct plan, the services of the broker related to the mutual fund investment will get ceased. Therefore, investors should think deeply before opting for such a switch.
Investors can verify whether or not the scheme has been switched by checking the new account statement.
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