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.
#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.
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.
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.