Switch to Direct Plans - Switch from Regular to Direct Mutual Funds | Groww (2024)

FAQs

What happens when you switch mutual funds from regular to direct? ›

Switching to a direct mutual fund increases your return on investment, unlike regular mutual funds that usually have a higher expense ratio thus reducing your ROI.

Switching mutual funds without a proper reason can hamper your long-term returns and increase your costs. The exit load and capital gains tax: When you switch from one mutual fund scheme to another, or from a regular plan to a direct plan, it is considered as a redemption and a fresh investment.

Direct plans have lesser costs and give higher returns over regular plans. Over a sufficiently long investment horizon, the difference in returns can be substantial. However, you need to have some investment experience and knowledge to invest in direct mutual fund plans.

Normally switch takes 3 working days however this can change depending on the type of scheme & fund house. You can track your switch order in the progress section on the mutual fund dashboard.

In the case of regular funds, the fund house adds your advisory charges to the expense ratio. If you are a market-savvy investor with a keen interest in finance, then direct funds can be the right choice for you.

Direct mutual funds typically have a higher NAV due to their lower expense ratio. This lower expense ratio in direct funds allows a larger portion of your investment to actively generate returns, potentially leading to higher overall returns compared to regular funds with higher expense ratios.

Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

Switching of funds means moving the money from an investment scheme to another investment scheme. Investor can switch between two different schemes i.e. money is taken out of fund A (a sell order) and invested in fund B (a purchase order). This way a switch, order results in two transactions a purchase & a sale.

The returns of any direct mutual fund are always higher than the regular version of the same mutual fund. The main reason behind this is the 'expense ratio'. The expense ratio is lower for direct plan vs regular plan as mentioned above.

Is it good to invest in direct mutual funds? ›

Embarking on the journey of investing in direct mutual funds can be a rewarding step towards financial growth and independence. By opting for the direct route, investors gain the advantage of bypassing intermediary commissions, potentially leading to increased returns on their investments.

It is generally recommended to exit a poorly performing mutual fund if it has consistently underperformed its benchmark over a sustained period of time, typically 1-2 years. Investors should also consider the reasons for the poor performance and evaluate if those issues are likely to persist in the future.

To discourage excessive trading and protect the interests of long-term investors, mutual funds keep a close eye on shareholders who sell shares within 30 days of purchase – called round-trip trading – or try to time the market to profit from short-term changes in a fund's NAV.

For most mutual funds categories, there is no prescribed holding period, however factors such as exit load, capital gains tax, performance, liquidity and financial goals should be taken into consideration when deciding the ideal period to stay invested in a scheme.

Since switching from regular funds to direct mutual funds is considered as a new investment, the switch can attract tax on capital gains. The applicable taxes can also vary depending on the type of capital gains i.e. long-term or short-term capital gains.

Investor Bias: Direct investors tend to develop particular biases, which may eventually affect the investment portfolio. For instance, investors concentrate on similar category funds or funds they develop a liking for without getting into the basics.

In most, if not all, cases, when a mutual fund is competently managed you will not see any tax consequences from a reinvestment. However, if you receive a capital gains distribution you may owe capital gains taxes on that money.

So, if you want units to be in the name of a relative, you must first send money to the receiver's account. You may then use that money to invest in the fund that bears their name. The only time mutual fund units can be transferred to another person is if the unitholder passes away.