Investing in mutual funds is a great way to grow your wealth over time, but it’s important to understand the different types of plans available and how they can impact your returns. One common choice investors face is whether to invest in a regular plan or a direct plan of a mutual fund. While both types of plans offer access to the same underlying investments, there are some key differences to consider before making a switch.
First and foremost, it’s important to understand the fee structure of regular and direct plans. Regular plans typically come with higher expense ratios, as they include charges for distribution and other expenses. On the other hand, direct plans have lower expense ratios, as they are sold directly by the fund house without the involvement of intermediaries. This means that direct plans generally offer higher returns compared to regular plans, as a larger portion of the returns goes towards the investor’s account.
Another important consideration when deciding between regular and direct plans is the minimum investment amount. Regular plans generally have higher minimum investment amounts, which can make them less accessible for some investors. Direct plans, on the other hand, often have lower minimum investment amounts, making them more accessible for smaller investors.
It’s also important to consider the type of investor you are when deciding between regular and direct plans. If you’re a hands-on investor who is comfortable with researching and selecting your own investments, a direct plan may be a good fit for you. On the other hand, if you prefer to work with a financial advisor or prefer a more hands-off approach, a regular plan may be a better option.
When switching from regular to direct plan, it’s important to ensure that the mutual fund scheme you are invested in has both options available. Also, it’s important to check the lock-in period and exit load of the scheme before switching. If the lock-in period is not over and exit load is applicable it’s better to stay put.
However, if both the conditions are met, you can switch to direct plan after selling the units of regular plan and buying the units of direct plan at the same NAV. However, it’s important to note that switching to a direct plan may have tax implications. For example, if you switch to a direct plan within a year of buying the regular plan, you may be subject to short-term capital gains tax. In addition, if you switch to a direct plan after a year of buying the regular plan, you may be subject to long-term capital gains tax. Since capital gains up to 1 lac every year are exempted from tax, you can look to stagger the switch over multiple months such that the gains are spread between multiple financial years.
In conclusion, the decision to switch from regular to direct plan of a mutual fund scheme depends on the investor’s investment objective, investment horizon, and risk appetite. It’s important to understand the fee structure, minimum investment amount, and type of investor you are before making a decision. And, also consider the lock-in period, exit load and tax implication before switching.