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Home / Money / Personal Finance /  Points to note when switching from regular to direct MF plan
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All mutual fund schemes come with two types of plans—a regular plan and a direct one. A regular plan is one where you invest in a scheme through a mutual fund distributor. A ‘direct plan’ , however, allows you to invest without the help of an intermediary.

Both the plans have common portfolios managed by the same fund manager. The only difference is that these schemes have a different expense ratio, a fee that is collected from investors for managing their funds.

The direct plan has a lower expense ratio than the regular plan as there is no distributor/agent involved in managing the former. Thus, direct plans are less costly than regular ones. Here are some points to note if you decide to switch from a regular to a direct plan of a mutual fund. Direct plans are suitable only for those who can afford to research the funds and shortlist the ones to invest in without help from an intermediary.

Switching from one plan to another is considered redemption and re-investing. Thus, capital gains tax and exit load as applicable at the time of redemption are applicable at the time of switching as well.

Exit load, if any, reduces the redemption value, which will be reinvested in the direct plan of the scheme.

In terms of taxes, when you switch in case of an equity mutual fund within one year, the short-term capital gains (STCG) are taxed at 15%. If the holding period is more than one year, gains over 1 lakh per annum are taxed at 10%. For debt mutual funds, when invested for over three years, gains are taxed at 20% after indexation. If held for less than three years, the short-term capital gains are taxed at slab rates of the individual.

Switching is not possible if the fund you invested is in the lock-in period. For example, equity-linked savings schemes (ELSS) come with a three-year lock-in period. You can exercise the switch option for the ELSS fund only after completion of the three years from the date of investment.

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