There is no reason why a Do-it-Yourself (DIY) investor needs to invest in regular plans of mutual fund schemes. There are so many online direct plan platforms around that convenience is no longer an excuse for investing in regular plans.
Therefore, it is almost criminal for a DIY investor to invest with say ICICIDirect.
Even for those who need assistance in portfolio construction and investment discipline, I would suggest working with a SEBI Registered Investment Adviser, pay a fee and subsequently invest in direct plans.
However, if you feel your distributor has helped you grow wealth, added real value to your portfolio (not easy to assess) and helped you maintain investment discipline, you can continue with the same distributor. However, do note that there is a cost involved and you need to weigh the cost against the benefits.
If you are new to mutual funds direct plan vs regular plan debate, suggest you go through the performance comparison between direct and regular plans in this post.
Now, a very pertinent question.
You have decided to make fresh investments in direct plans. But what about your existing investments in regular plans? Do you have to continue with such investments or you can move those investments to direct plan too?
So, the big question is:
How to shift from Regular mutual fund to Direct plan?
In this post, I will talk about how you can switch your existing investments in regular plans to direct plans. I have been getting too many e-mails and phone calls about this. Better to put this down in a post.
I have invested in Regular plan of a MF scheme. I want to convert/switch my investment to direct plan. What do I do?
If your investment is already more than a year old (for equity investments), you CAN switch straightaway to direct plan.
If the holding period is less than 1 year, you will have to wait until your investment completes 1 year. Subsequently, you can switch.
Earlier, in case of equity funds, you simply had to wait for your investment to complete 1 year to switch from regular to direct plan.
Why 1 year?
Because the sale of equity fund units after holding for 1 year qualifies the resulting capital gains as long-term capital gains (LTCG). And LTCG on the sale of equity funds was exempt from tax. Moreover, most equity funds have an exit penalty (load) if you exit before 1 year.
However, with the introduction of tax on LTCG on sale of equity funds in Budget 2018, the situation has become slightly complicated.
Since the LTCG on the sale of equity funds is exempt to the extent of Rs 1 lac per financial year, you may want to place multiple switch requests to reduce your tax liability on switch.
Additionally, since LTCG is now taxable, LTCL (long term capital loss) on the sale of equity funds can now be used to set off LTCG on other capital assets (including equity funds). Or LTCL or STCL on the sale of capital assets (including equity fund units) can be used to set off LTCG on equity fund units. I am talking about tax loss harvesting.
So, you need to look at such opportunities too to reduce your tax liability.
Even though you should still look to switch after 1 year, the introduction of LTCG tax, exemption of Rs 1 lac per year and potential tax loss harvesting opportunities may require you to tweak your plan a bit.
Do note Switch from regular to direct plan is equivalent to Redemption (sale) from regular plan followed by Fresh Investment (purchase) in Direct plan. Your investment platform may give an option of 1-click switch from regular to direct. However, from the perspective of income tax department and for the purpose of exit load, a switch is still sale in regular plan followed by purchase in the direct plan of the same scheme.
I have a SIP in regular plan. What do I do? Can I switch my SIP to direct plan?
No. Technically, you can’t convert your SIP from regular plan to direct.
However, you can follow a 3-step process to get the desired result.
- Stop SIP in regular plan.
- Start SIP in direct plan.
- Switch investment in regular plan to direct plan after 1 year (for equity fund investments).
Points to Note while switching/converting from Regular plan to Direct plan
#1 Switch from regular to direct plan is equivalent to Redemption (sale) from regular plan followed by Fresh Investment (purchase) in Direct plan.
#2 Therefore, a switch from regular to direct plan can subject you to exit load and capital gains tax.
#3 This period of 1 year is only for equity funds. This is because long term capital gains on equity funds are exempt from income tax after 1 year. Moreover, most equity funds levy exit load if you exit before 1 year.
#4 The holding period is NOT counted from the day of your first purchase in the mutual fund scheme. You must consider holding period for each unit.
Read: NAV of Direct plan is greater than NAV of Regular plan? No reason to worry
#5 You purchase 100 units of X fund on Jan 15. 2017 and 150 units on May 15, 2017. To avoid exit load and (reduce) capital gains tax, you can sell the first 100 units on Jan 16, 2018 and the remaining 150 units on May 16, 2018 (or later) to avoid exit load and reduce capital gains tax.
#6 Exit load period may vary across schemes. Hence, you need to check and make an adjustment in switching plans accordingly.
#7 There are many equity funds that levy exit load for redemption before even longer holding periods. For instance, Quantum Long Term Equity Fund charges exit load till the end of 2nd year. In such funds, you may have to wait for a longer period if you want to switch without a cost.
#8 There is no compulsion that all the regular plan units have to be switched to direct at one go. You can switch gradually as and when exit load period for units gets over.
#9 ELSS fund comes with a lock-in of three years. Therefore, if you have invested in the regular plan of an ELSS scheme, you need to wait for at least 3 years before the switch. Do note if you switch to direct, your investment will again be locked in for 3 years.
#10 At the same time, there are equity funds (mostly index funds) where the exit load period is less than 1 year (say 7 days or a month). However, there is no change in the capital gains tax regime.
#11 In such cases (index funds), if you are sitting on a big loss, you can exit after load period is over but before 1 year is over. This way, you will be able to book short-term capital loss. You can use this STCL to set off your other short-term capital gains. This is known as tax loss harvesting.
#12 If you sitting on capital gains (in index funds), you may have to wait for 1 year before switching to direct.
There may be a case when you want to book short-term capital loss despite exit period being not over. You need to weigh the cost of exit load against the benefit of tax-loss harvesting. I leave this to your judgment.
Read: Performance Comparison: Direct plans vs. Regular plans
Can I switch from regular to direct in debt mutual funds too?
Yes, you can convert your debt fund investments too from regular to direct. If you have a SIP in a regular plan debt fund, you need to follow the same procedure as discussed for equity funds above.
There is a minor difference though.
With debt funds, exit load is typically not that big a problem. However, for your gains to qualify as long term gains, the holding period must be at least 3 years. Even after 3 years, LTCG is not exempt. LTCG in case of debt funds is taxed at 20% after indexation.
Short term capital gains (holding period < 3 years) are taxed at your marginal tax rate (slab rate).
Therefore, you will need to wait for at least 3 years before you switch to direct plan.
Can I hold both direct and regular plan units in the same folio?
Yes, you can. For all practical purposes, consider regular and direct plans two different schemes.
How can I NOT switch from Regular to Direct?
Let’s look at ways through which you cannot switch.
- You cannot go to your bank to switch your regular plan units to direct plans.
- You cannot switch MF units from regular plan portals such as ICICIDirect, FundsIndia or MyUniverse.
- You can’t go to your distributor to switch.
Why?
Because banks, ICICIDirect and your local distributor are distributors and can only offer regular plans.
How do I switch/convert from regular to direct plan?
- You can go to the nearest AMC branch and fill up a form. The problem is you will have to visit branches of all AMC offices where you have investments.
- You can go the nearest RTA office (CAMS, Karvy etc) to fill up a form. This is a better option than the first one.
If you are comfortable with online transactions, it is much easier.
- You can log in to respective AMC websites and switch easily.
- You can even use RTA website/apps (CAMS. Karvy) to switch online.
If you have registered with MF Utility and applied for online access, you can switch your existing regular plan investments easily to direct plans. MF Utility, currently, has 28 AMCs onboard. You can switch your investments from regular to direct plans with those 28 AMCs.
Do note you can even switch investments you didn’t make through MF Utility.
Apart from MFU, there are many CAN based online direct plan platforms (i.e. built upon MFU as the platform) which may allow such switches from regular to direct plans.
Go Direct!!!
23 thoughts on “How to switch (convert) from Regular plan to Direct plan of a MF scheme?”
Dear Mr. Deep – Thanks for your insights about switching to Direct Funds and as usual, it gains ***** (5-Stars) for your details. However, I would like to add one more important steps in regards to ‘Debt Mutual Funds’ switching to Direct Plans and hope you will add your perspective:
– Debt Funds have a lock-in period of 3 years and after that it’s subjected to 20% Capital Gains Tax subjected to Indexation which essentially means that most of us will not pay any tax or will pay a minimal tax of 1%.
– Even if we switch the fund after 3 years from ‘Regular Plan’ to ‘Direct Plan’, the entire amount will be considered as NEW Investment Amount in Direct Plan which will further have 3 years lock-in period and will be subjected to Short-term capital gains tax if anyone needs to take the money within that time period, thereby incurring additional tax. The obvious reason which we cannot avoid is that we are closing the Regular Plan after 3 years and opening a new Direct Plan subjecting to this new 3-year lock-in period.
– Effectively if we keep our plan in Regular Plan itself even after 3 years, we are subjected to only a minimal tax whereas if we switch to Direct Plan, we will have to pay additional STCG tax if we want the money from 4th to 6th years. It means, if we want the money only after 6th year, then we will come under LTCG tax effectively reducing taxes ensuring our objective is satisfied with MINIMAL TAX and MINIMAL EXPENSE due to lower expense ratios. Since the Expense ratios are only 2% at max, can we keep continuing in Regular Plan itself if one wants to take the money from 4th to 6th year completing all our withdrawals and starting afresh with our new investments with DIRECT Plans?
The above is true only for DEBT Mutual Funds and is also true for EQUITY Mutual Funds except the holding period changes from 1 to 2 years instead of 3 to 6 years in case of the former.
Can you please post your views whether the above one is correct? Am I missing anything??
Thanks
Bavan
Thanks Bavan for the kind words. Please share with your friends.
I completely agree with what you have written. At the time of switch, such aspects as timing of actual use of funds (redemption in direct plan) should be kept in mind.
In fact, you can wait for the new financial year if you want to get greater benefit of indexation.
Minor inputs
1. Debt funds don’t have a lock-in of 3 years. The holding period of 3 years is to qualify for benign long capital gains tax treatment.
2. There is no guarantee that tax will be as low as 1% even after indexation. There can be a bigger gain or even a loss.
3. Equity funds were never meant for short term investments. If you think the money may be need in 1-2 year, you shouldn’t switch to direct plan of same equity scheme but to a debt fund (unless you are taking a call on short term market movements).
Thanks Deep and the first thing I do when I read your articles is to share in Facebook thereby ensuring some of my friends are benefitted by it. In fact, I normally summarize your views in 3 headlines so that even if they don’t have time, they will know what’s the essence of the message and in fact that will tune more number of friends to read the article fully.
Having said that, all your 3 comments are right but the comment 1 is for our psychological compulsion that I use the word lock-in as it will ensure that we pay minimal taxes and keep the money invested instead of trading the money.
Comment 3 regarding equity funds also falls on psychological compulsion as a minimum of 2 years in equity funds is better and as you say that more the number of years we keep in the same equity fund, the more the juicy returns but investors got to do a complete research in selecting equity funds as switching from one fund to another will cost more and hence if they stick to a well-researched equity funds like HDFC Top 200, then they do a favor to themselves!!
Appreciate that you share the articles.
Sure, I get the point.
You both deep dive into this topic which really awake me from blindly switching from regular to direct. Thanks a lot!!
You are welcome, Thangavel!!!
Please do share with your friends too.
Just one thing, the post is not updated. With tax on LTCG on sale of equity MFs in place now, you will have to account for that too and chalk out the most efficient strategy.
Can i switch from SBI Magnum Reg to SBI Pharma fund direct plan?
You can switch from regular plan of any scheme of SBI to direct plan of any scheme of SBI.
Hello Sir,
I am new in Mutual fund investor. I have invested SIP in four mutual funds in last 22nd September 2017 through agent. They are 1. SBI Blue chip (G): 2000/-, 2. Aditya birla sun life equity fund (G): 2000/-, 3. Axis long term equity :2000/- and 4. Reliance tax saver (ELSS) :2000/-.
Sir please tell me, I am selecting the wright mutual funds or not ?
According to review, can I change regular plan to direct plan right now ?
Please suggest me.
Thanks
Hi Ranjan,
Difficult to comment on the choice of funds unless I know more about you.
About switch to direct, here is what you should do.
Stop SIP in regular plan.
Start SIP in direct plan.
After 1 year, switch investment in regular plan to direct plan.
How to Stop SIP in regular and Start in Direct? To whom should I contact or where to Go because at that time I gave a cheque to broker and SIP had started from next month.
Please suggest.
To stop in regular, you need to contact your distributor or the AMC.
To start, there are many ways to invest in direct plans.
Suggest you go through the following post.
https://www.personalfinanceplan.in/mutual-funds/list-online-direct-plan-platforms/
Recently I switched my mutual fund plan from Regular to direct ,but it still debiting amount from regular plan so how can I change that one?
Hi Harsha,
Are you talking about a SIP in regular plan?
Hi dear Deepesh ur blog is very informative and thanks for all d information. I am 35 years and planning to start my investments now. I want to start with direct mutual funds dsp black rock ELSS tax saver plan. I want to do it myself in direct plan as I have plans to invest in future also at leats one lakh per month. At present want to start in ELSS as tax saver and want to expand to different types of other funds if I am comfortable with MF. My doubts are
1.where to start funds direct AMC website or through MF utility?
2. Also I feel I need the help of SEBI RIA at least for sometime, whom to contact and how?
3. I want to continue for atleast 15 to 20 yrs if funds are performing ok. How to decide when to continue or stop the fund depending on the performance . Will SEBI RIA guide In that process too?4.When n how to pay RIA?
Thanks Kiran!!!
1. You can choose either. I use MF utility.
2. You can find out the list of RIAs from SEBI website. You can talk to a few in your city and make a choice. Do not go by a curated list anywhere. They may be quid pro quos involved. Assess for yourself. Talk or meet them and decide.
3. Yes, that should be part of work mandate for an RIA. But yes, you have to continue to pay him/her his fee.
4. When and how to pay? RIA will tell you.
Btw, I am a SEBI RIA too. 🙂
If interested, please do visit the “Our Offerings” section.
Thank u for the information.
Hi Deepesh,
I’d like to switch over my one of the equity SIP from regular to direct where I am investing from more than a year. I’ve following questions :
1) As its SIP, I assume, if I switch over exiting plan the accumulated amount will attract exit load ?
2) If option 1 is yes, can I only stop existing SIP and start a new one direct SIP? in that case, my existing accumulated amount will still lay in regular plan and new SIPs will get placed as separate investment under same folio ?
Thanks
Hi Amit,
You can’t switch SIP. You can only switch investments.
SIP in regular plan needs to be closed and SIP in direct plan needs to be started.
About existing investments in regular plan, you can switch once the exit load period is over and capital gains tax is benign.
Hello,
Nice article.
I have one clarification, In an ELSS fund, after 3 years locking period over, If I am converting from Regular to direct MF in the same fund, will it be considered as an investment for that financial year?
Thanks in Advane
Hi Sam,
It will be considered a fresh investment. You can take tax benefit under Section 80C.
Hi Deepesh, I have been investing in Equity MF SIP for the last 12 years through Regular Option and the fund accumulation is quite substantial. Considering that switching is equivalent to redemption and reinvestment, (LTCG could take a reasonable chunk since the Long term gain is a big amount running into lakhs). In this scenario, will it be wise to switch from Regular to Direct? Pls advise
Hi Balaji,
This is a difficult question. Taxes cause friction.
Can’t answer this without looking at the data.
A few points to ponder over (I assume you are DIY investor and picked funds on your own):
1. Up to Rs 1 lac of LTCG is exempt every year. Utilize this to the hilt.
2. You avoid paying LTCG if you don’t switch. However note that every year you will losing a small percentage of return to higher cost. Compare that against the tax impact.
3. Attack those funds first where the difference in expense ratios is the highest.
4. Taxes will eventually have to be paid (there is no indexation benefit for equity funds).
5. You won’t have to pay tax on entire gains. Gains accumulated until January 31, 2018 are exempt from tax.
Hope this helps you decide.