Switching from Regular to Direct Mutual Funds: A Step-by-Step Guide

Many investors unknowingly opt for regular plans with high expense ratios when investing in mutual funds. However, switching to direct plans offers a simpler, more cost-effective alternative. Pending AMFI 55, approximately 55% of the total investment still comes from regular mutual funds. But the good news is that you can switch from regular plans to direct plans with ease. This article will guide you through the process and highlight the benefits of such a switch using the INDmoney app.

Why Switch to Direct Plans?

Direct plans offer the same investment strategy as regular plans but with significantly lower costs. This is because direct plans do not involve an intermediary, such as an advisor or broker, which reduces the overall expense. To make an informed decision, it's essential to understand the differences between the two types of plans.

The Process of Switching to Direct Plans

Switching from regular to direct plans is a straightforward process that can be done through the INDmoney app. Here’s how you can do it:

1. Use the INDmoney App

First, download and log into the INDmoney app. The app provides a user-friendly interface to help you manage your investments more efficiently. You can check your current investments and opt for zero-commission direct funds. The app also allows you to synchronize and track all your mutual funds from other apps in a single view dashboard.

2. Benefit from One-Click Switching

The INDmoney app offers a one-click option to switch from regular funds to zero-commission direct funds. This feature ensures that you can make the switch quickly and without any unnecessary hassle. Additionally, you can use the app’s free portfolio scan to gain insights into your investment performance, including under-performing funds, sector-wise fund allocation, and peer comparisons.

3. Consider Losses Due to Switching

When switching from regular to direct plans, there are a few factors to consider that might result in a small loss. For instance, the unit pricing in regular plans typically has a lower Net Asset Value (NAV) compared to direct plans. This means that you will have to buy at a slightly higher NAV in the direct plan. Additionally, when you sell, there might be exit loads and capital gains taxes, and 0.005 will be deducted as stamp duty.

4. Calculate the Actual Loss

Let's break down an example to better understand the potential losses:

tAssume you have 1,000 units in a regular plan with a NAV of 15. tThe direct plan has an NAV of 15.1. tYour sale will fetch you 15000 (1,000 * 15). tYour purchase in the direct plan will fetch you 993.328 units (150000.99995 / 15.1), after deducting the 0.005 stamp duty. tYour total loss is -100.08 (15000 - 151 * 993.328).

While the initial switch may result in a small loss, in the long run, you will recover this money due to the lower fees associated with direct plans.

Is It Internally Possible?

Muthukumar Dhanasekar informed me that switching from regular to direct plans is indeed possible internally. This means that you can make the switch without involving a broker or advisor, further simplifying the process. This confirmation is a significant advantage, as it ensures that the transaction can be handled efficiently and cost-effectively.

Conclusion

Switching from regular to direct mutual funds can significantly reduce your overall expenses and improve your investment strategy. By leveraging the features of the INDmoney app, you can simplify the process and ensure a seamless transition. Although there may be a small initial loss due to the differences in NAV and associated fees, the long-term benefits of switching to direct plans far outweigh the initial loss.