In the regular plan, the AMC broker or the distributor collects the commission from the investor by adding it to the expenses of the MF. Direct plans are cheap due to lack of commission
Direct Plan: Investment is also made on investing in mutual funds. In this, the expenditure in regular fund is less than that of direct fund. This is the reason why people decide to switch from regular to direct. For example, the SBI-focused equity fund’s regular plan has an expense ratio of 1.77 percent, while the direct plan of the same fund has an expense ratio of 0.78 percent. The expense ratio is the charge that the fund house charges you for management. The larger the expense ratio, the more part of the return on withdrawing money from your fund will be passed on to the asset management company as a charge.
When the expense ratio is low, you will get a greater part of the return, that means only a lesser part of the earnings will go to the fund house. But before switching from regular fund to direct fund, you have to understand some specifics.
Direct Plan Vs Regular Plan: What is the difference?
Direct funds are purchased directly from the fund house – from the Asset Management Company website. At the same time, the regular fund is purchased from a broker, distributor, agent, adviser, intermediary. Due to being an agent between the investor and the fund house, the agent is also charged. The fund house pays a fee to these intermediaries and collects it from the investor by adding it to the mutual fund’s expenses. If investors invest in multiple funds from the same intermediary, then they are able to track and invest, which is why they choose regular funds even after charging more. For direct funds, one has to invest directly from the AMC website.
How to switch?
The switching process can also be completed online. All you have to do is log in to your mutual fund account through AMC or agency like CAMS and KARVY. You can make changes related to the fund by going to the transaction page. It will also have the option of switching, where you will have to write the name of your fund which you want to switch. After entering the name, there will be a direct plan option which you have to choose. Further process will have to be completed according to the form, after which this change will happen within 4 business days. At the same time, if you want to do this whole process offline, then you have to go to the nearest branch of the fund house and fill the switch form. Information such as the name of the fund, folio number will have to be given, after which the process of switching will begin. You can also complete this process through your broker, distributor.
Tax on switching?
Direct Plan: Keep in mind that switching funds is considered as redemption. Investor’s units are not transferred, instead it is reinvested in a direct plan after exit from regular. Due to this redemption, it is taxed. Equity-linked investment options attract a 15 per cent short-term capital gains tax for a period of less than 1 year. At the same time, if there is more than 1 lakh profit over a period of more than 1 year, then there is a 10% long term capital gains tax liability on it. At the same time, there is a tax on debt funds, just like any other debt option. Apart from this, there can also be securities transaction tax and exit load.
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