Things to know before switching from regular to direct mutual fund plan

Is there any fee to be paid while switching from regular to direct mutual fund plan? What should you be mindful of? Find out.

Switching from regular to direct mutual fund: Things to know

When you switch from a regular to a direct mutual fund plan, you're essentially exiting from the regular plan and entering the direct plan. The exit will be considered as a redemption from the existing (regular) scheme. Correspondingly, when you invest the proceeds in the new (direct) scheme, it will be considered as a fresh investment. Same is the process if you wish to move from one broker to another.

There are some things you should know before switching from regular to direct mutual fund plans:

  • Exit load: An exit load is an expense where a certain percentage of the NAV is deducted at the time of mutual fund redemption. It is levied usually if you exit from the mutual fund scheme within a specified period. In an equity fund, exit load is applicable if the investment is redeemed within a year. Learn how exit load in mutual funds is calculated.
  • Lock-in period: Certain funds such as equity-linked savings schemes (ELSS) and some solution-oriented schemes like retirement and children-specific funds have a mandatory lock-in period. One cannot switch from a regular to a direct plan, even of the same mutual fund scheme during the lock-in period.
  • Capital gains tax: You'll attract capital gains tax when you exit from (or redeem) the regular mutual fund plan. Understand how your mutual fund gains are taxed. If you wish to reduce the tax liability, transfer the amount to the direct plan in a staggered manner. You can spread your investments across 12-15 months if the amount is huge.

    Also, look for opportunities in the form of a sharp correction in the market to make these shifts. Whenever the market falls, some of these capital gains erode. That itself can be an opportune time to make some of these shifts.

Do note that the exit load, lock-in period and taxation may differ if you've invested via SIPs. These are calculated from the date of each SIP instalment separately. So if you've invested in an ELSS fund which has a lock-in period of three years, each SIP has to complete three years before you can redeem from it. It's the same for when you calculate the tax liability and exit load.

It should also be noted that direct mutual fund plans (when compared to regular plans) come with a slightly lower expense ratio. A small 1 per cent extra fee can massively affect your returns in the long run. Learn how expense ratio can affect your returns.

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