Regular and direct options are the two variants that every mutual fund offers. In contrast to a direct plan, a regular plan mutual fund is one where you invest in a scheme via an intermediary i.e., a broker or distributor. Such intermediaries’ handhold you in the mutual fund investing procedure, help you in the documentation process while making transactions, and provide expert guidance, among other services.
In the case of a direct plan, you are basically devoid of such assistance as you buy a mutual fund scheme directly from the concerned asset management company or fund house. As direct plans endow higher returns (owing to their relatively low total expense ratio) than their regular counterpart, you as an investor mostly are advised to select this option if you have a good understanding of distinct mutual fund schemes and require no assistance.
However, just wait! There is more to this.
Consider the below-mentioned aspects if you are looking to switch from a regular to a direct plan to make an informed decision.
- Lock-in period
Only after the lock-in period of the regular plan has finished, you can consider shifting to the direct plan. ELSS (equity-linked savings scheme) comes with a mandatory lock-in of 3 years. You cannot switch from regular to direct option, even within the same fund scheme while serving the lock-in. Similarly, specific solution-linked schemes like retirement and child-based funds might come with a lock-in of up to 5 years.
Also, ensure to be careful of the investment that you do through an equity SIP. The lock-in period is computed from the date of every instalment separately. So, an SIP in ELSS in January 2023 will be free of lock-in in January 2026. Thus, every SIP instalment must complete 3 years before it becomes free of lock-in. When you go for the switch to the direct option, the lock-in will begin again on your new investment.
- Exit load
Many equity funds penalise you in the form of exit load if you withdraw your fund from your scheme early. An exit loan is a specific percentage of net asset value that gets reduced during the redemption time. Generally, it is charged if the fund investment is liquidated within 1 year from the equity mutual fund.
In case you have invested your money in a regular plan through the SIP mode, the exit load will be computed from the date of every monthly instalment. Also, when you shift to the direct option, it will be looked upon as a new buy.
When you shift from the regular to a direct option, redeeming units of the regular scheme will incur capital gain tax.
How can you shift from a regular plan to a direct plan of a mutual fund?
Online mode for investing in a mutual fund scheme is distinct for distinct platforms. In case your fund has no option to shift from regular to direct, you must choose the “redeem option” for the current fund and then place a buy order for the direct option of the same mutual fund scheme once the amount redeemed is received by you. However, note that few platforms might endow you with the choice to make the shift directly.