Should you switch from regular to direct mutual funds?

Summary: Are you currently invested in the regular plans of your mutual funds and want to switch to their direct counterparts? Here are some things to keep in mind before doing so.

I have a few regular mutual fund SIPs. Since direct plans give more returns, should I stop regular plans and start direct plans in their place? – Shailendra Pathak

Regular plan and direct plan – these are the two variants of every mutual fund scheme.

Contrary to a direct plan, a regular mutual fund plan is one in which you invest in a mutual fund scheme through an intermediary (distributors or brokers). These intermediaries handhold you in the process of mutual fund investing, assist you in the paperwork while making transactions and offer expert guidance, among many other things.

In a direct plan, you are devoid of any such assistance from intermediaries since you purchase mutual funds directly from the AMC or fund house. Although direct plans offer higher returns (due to lower expense ratios) than their regular plan counterparts, investors should choose them only if they have a thorough understanding of different mutual fund schemes and do not need any assistance.

But wait! There's more.

If you are still planning to switch from a regular plan to a direct plan, there are three more factors that should be worth your consideration.

#1 Lock-in period

Only after the lock-in period of the regular plan has ended can you switch to its direct plan. Equity-linked savings schemes (ELSS) have a mandatory lock-in period of three years. One cannot switch from a regular to a direct plan, even of the same scheme ,during the lock-in period. Likewise, certain solution-oriented schemes like retirement and children-specific funds may have a lock-in period of up to five years during which the switch/redemption cannot be made.

Also, be mindful of the investments that are made via SIPs. The lock-in period is calculated from the date of each instalment separately. For instance, an SIP in an ELSS fund (with a three-year lock-in) in September 2019 will be free of the lock-in in September 2022. Thus, each SIP instalment has to be completed within three years before it is free of the lock-in period. When you make the switch to a direct plan, the lock-in period will start over again on the new investment.

#2 Exit load

Most equity mutual fund schemes penalise the investor in the form of an exit load on an early withdrawal. An exit load can be a certain percentage of the NAV that is deducted at the time of redemption. It is usually levied when an investment in an equity fund is redeemed within a year.

If you've invested in a regular plan via an SIP, the exit load period is calculated from the date of each monthly instalment. And, when you switch to the direct plan, it is considered a new purchase and the new exit load tenure will begin from the date of the investment. So ensure that redeeming your funds does not attract an exit load.

#3 Taxation

When you switch from a regular plan to a direct plan, for taxation purposes, it will be considered first as a redemption from the existing (regular) scheme and then as a fresh investment in the new (direct) scheme. So redeeming units of a regular mutual fund scheme will attract capital gains tax.

As in the case of new investments made to the direct plans, the lock-in periods and exit loads, the tenure to qualify for the capital gains will start from the date of investment in the direct plan. Do keep this in mind to avoid unnecessary tax outflows due to tax implications.

Suggested watch: Pros and cons of shifting from regular to direct plans

This article was originally published on September 14, 2022, and last updated on December 29, 2025.