Mutual fund Direct plans vs Regular plans – Which is the better option?
From Jan-2013, as per direction from SEBI, mutual fund houses have started tracking the mutual fund schemes under direct plans separately. Mutual fund direct plans are those where mutual fund schemes would not charge distributor expenses / trial fees and hence the NAV of such direct plan would be higher compared to regular plan. However the investment mix in the mutual fund scheme would be same for direct or regular plans. Earlier mutual fund houses have already issued mutual fund direct route, however whether it is thru distributor or thru direct route, it was tracked with single NAV, hence an investor was bound to buy mutual funds based on the NAV.
Features of Mutual fund direct plans
- Individual investors can directly invest in direct plans without involving distributors or brokers.
- There would not be any distribution / trial fees paid to distributors or brokers for such mutual fund direct plans. Hence the annualized expense ratio would be lower and investors would get higher returns compared to regular plans. The equity mutual fund direct plans scheme expense ratio would get gained between 0.50% to 0.75% p.a. and debt mutual funds between 0.20% to 0.50% p.a. depending upon the mutual fund house expense ratio.
- There would be a separate NAV (Net asset value) for direct plans. The scheme would denote “Direct” in its description for such direct plans.
How to switch from existing mutual fund regular plans to Mutual fund direct plans?
Direct route: If you have earlier invested your mutual funds through direct route, these mutual fund plans are already been shifted to mutual fund direct plans. Hence an investor need not worry about this. In case the switch has not happened for any reason, an investor can contact mutual fund house.
Regular mutual funds: If the investor wants to switch from regular mutual funds to direct plans in mutual funds:
Lump sum investments: If an investor made lump sum investments, then he/she can submit switch form to mutual fund house. These mutual fund units would be shifted from regular mutual fund schemes to direct plan of mutual fund schemes.
SIP: If you are investing through SIP, then an investor can submit switch form, where the existing SIP units would get shifted from regular plan to direct plans. All future SIP transactions also would get automatically shifted to direct plans.
However both these options would attract, STT, capital gains tax and exit load depending upon the period of investment.
Agent will not submit your application for direct plans as he would not get distributor or trial fees.
Are there any additional costs involved during or after switching to direct plans?
Switching from regular mutual fund plans to direct plans of mutual fund would cost you.
Direct mode to direct plan – No costs: If the shift is from mutual funds direct mode (earlier who invested directly) to mutual funds direct plan, there is no exit load.
Exit load if redeemed before 1 year from original date of investment: If the shift is from regular plan to direct plan and if you withdraw the mutual fund investments before 1 year from original date of investment, necessary exit load would be applicable. E.g. if an investor had invested in regular plan during Apr-2012 and shifted to direct plan from Jan-2013. However, redeems during Feb-2013 (11 months from original date), it would attract exit load. MF industry feels that this exit load would protect the interest of distributors.
Capital gains tax: Necessary capital gains tax would be applicable for such switch from regular plan to direct plans. This switch would be treated as two separate transactions and necessary capital gains tax would be applicable.
Who should invest in such mutual fund direct plans?
- Direct plans in mutual funds is good for investors who wish to invest in mutual fund schemes by directly dealing with mutual fund houses without distributors.
- Investors who want to increase their returns by way of reducing expense ratio.
- Investors, who are tech savvy and have moderate financial knowledge in selecting good mutual fund schemes, can opt for such plans.
Drawbacks about mutual fund direct plans
Though mutual fund distributors or brokers would be against such direct plans as it would reduce their business, there are some minus points to be considered apart from this.
- Investors should invest directly without distributor getting involved.
- Investor should have moderate knowledge on how mutual fund schemes would run so that he can directly deal with them.
- Investor should take care of documentation process. It includes getting acquainted with various regulations from time to time, submission of mutual fund applications, tracking, portfolio consolidation, nominee inclusion or modification, change of address, KYC compliance issues etc.,
- Investors should do their own analysis and select top performing mutual fund schemes. Investor need to depend upon mutual fund websites or blogs to get to know about good mutual fund schemes.
How to handle mutual fund direct plans in better way?
Here are some suggestions on how to handle direct plans in mutual fund in better way.
Lump sum investments: If your investments have not matured 1 year, wait for one year to get capital gain tax exemption or reduce your capital gain tax and exit load and then switch to direct plans.
SIP: Stop existing SIP schemes in regular plans and start new SIP schemes in direct plans. Once your existing SIP regular plan mutual fund units come to a stage where it would not attract capital gain tax or exit load, you can switch those units to direct plan.
Conclusion remarks: Introduction of mutual fund direct plans is a good move. You can maximize your annualized returns by investing in these direct plans. If you have moderate knowledge about mutual funds and if you can invest some time for documentation purpose, it is worth investing through direct plans.
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Mutual fund Direct plans vs Regular plans – Which is better option