If I transfer my mutual funds from regular to direct plans, what would be the advantages and disadvantages?
- K Ghosh
Direct plans are less expensive than regular plans because, as per the regulations, the expense ratio of a direct plan is derived by subtracting the distributor's commission from the regular plan. It has been noticed that this gap of expense ratio is wider for new funds, probably because of higher commissions being paid by fund houses. Over five-ten years, the difference in your corpus created by a lower expense ratio becomes noticeable. So this is the primary advantage of shifting to direct plans, especially if you are investing for the long term.
However, there are two things that you should keep in mind before making this transition. One is that this transfer would be treated as redemption and fresh investment for the purpose of taxation. So the gains made by you so far would be subject to tax. Secondly, in the case of equity funds, AMCs usually charge an exit load of 1-2 per cent for redemption within a year. So, don't pull out your equity investments from the last one year.