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 Directplan
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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Understanding The Disadvantages Of Direct Plan Mutual Fund: Mutual funds are financial products that are professionally managed by finance experts. Mutual funds provide novice investors an opportunity to participate in the financial markets. These investment products are ideal for investors who want to be a part of investing community but do not have the time and knowledge to trade in the stock market.
What is a direct plan mutual fund?
Mutual funds are presently one of the most popular investment vehicles for investors. Experts believe that first-time investors should always start their investing journey with the help of mutual funds.
Advantages of investing in mutual funds include advanced portfolio management, dividend reinvestment (if you choose this option), risk reduction, diversification, etc. Mutual fund investments can be done through 2 modes: A regular plan and a Direct plan.
A direct plan is when you buy directly from the mutual fund company. This can be done by visiting their website or by physically visiting their office. On the other hand, a regular plan means buying with the help of an advisor, broker, or distributor (intermediary). While you might have heard that investors should go for a direct plan, there are certain disadvantages attached to it.
This article will walk you through the disadvantages of direct plan mutual fund. By the end of this article, you will have a fair idea as to why going for a regular plan will benefit, you and why beginners (in particular) should go for a regular plan.
Disadvantages of direct plan mutual fund
1. Selection of schemes might be difficult
There are several mutual fund schemes that are offered by various asset management companies in India. Therefore, investors tend to get confused in selecting one scheme from a range of schemes. More often than not, direct investors invest their hard-earned money on the basis of the past performance of one particular scheme without examining other factors.
Investments should never be made solely on the basis of past performance only. Since investing in mutual funds will expose investors to market-based risks, other factors should also be taken into consideration. Novice investors will find it difficult to judge these factors. Therefore, investing through a direct plan might put their capital at risk.
2. Decision Making
The investment portfolio of the investor should be monitored on a regular basis, and suitable alterations are required depending on market conditions. However, direct investors might not be aware of the suitable time to make amendments. Equity markets are dynamic and these markets are sensitive to several economic factors.
Any sort of data-related information can impact the stock market and the performance of the mutual fund scheme. The idea behind investing in a mutual fund is wealth creation. However, inappropriate, and late decisions can impact the journey of wealth creation in the long run.
Direct investors into mutual funds can develop particular biases, and these can impact their investment portfolio. For example, investors might concentrate on similar categories of funds. They might develop a liking for a certain category of funds and continue to invest in those funds.
Therefore, they tend to ignore the mechanics behind the mutual fund scheme. Biased investment decisions can impact the returns over the long run and an investor might end up making negative or fewer returns.
4. The appropriate time for redemption
All the investment decisions and completion of the formalities are to be done by the investor in a direct plan. Buying a mutual fund scheme directly from the company means you are eliminating the intermediary or adviser. Therefore, buying a direct plan will deprive you of having a mutual fund advisor.
As a result, investors cannot approach a mutual fund advisor for help. Right from completing the forms to making the redemptions—the entire process has to be completed by the investor. What most people forget while starting their mutual fund investments is they cannot withdraw the full amount upon maturity without paying a heavy tax. This is one of the biggest disadvantages of Direct Plan Mutual Fund.
This is the main reason why novice investors opt for regular plans instead of direct plans. Redemptions are to be carried out after analyzing the range of factors such as sectoral performance, allocation to a particular industry, etc.
5. Complex information
Investments into mutual funds are required to be made after understanding the basics of a scheme. For example, there are schemes having a lock-in for a certain amount of time, say 3 years. Secondly, what are the returns expected after the lock-in period? There are mutual funds that charge an exit load if redemption happens before a certain period of time.
All these factors should be examined. A first-time investor might be unaware of the lock-in period and might get the capital stuck. Mutual fund advisers can give investors a fair idea about the returns after the lock-in period. He/she can invest according to their goals. Therefore, involving a mutual fund adviser might help you to understand the complexities of investing in a mutual fund.
Are Direct Mutual Funds Better Than Regular Mutual Funds?
Though it has its own disadvantages, direct mutual funds are better than regular mutual funds in certain ways. As Direct mutual funds do not involve any third parties, there is no need to worry about paying commissions, which makes it cheaper than regular mutual funds. Direct plans are also recommended in the long run as they earn better returns than the regular plan.
As a first-time investor, you might not have the time required to regularly review the investment portfolio and make changes according to the market dynamics. This might impact the returns over the long term. There are other things to be considered before investing in a mutual fund.
These include the age of the fund, the fund house’s reputation, financial ratios, etc. A professional understanding of finance is required to get these things right. Thus, beginners might risk their capital.
In the end, the plan that works for you depends on the investment style. However, if you are not capable of doing the due diligence before investing in a particular scheme, consider going for a regular plan instead of a direct plan.
So, that’s all for the article on Disadvantages Of Direct Plan Mutual Fund, We hope you enjoyed reading it. Happy Investing!
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