A Mutual Fund-Direct Plan is what you invest in, directly from the mutual fund company or through platforms which help investors to in direct mutual funds, whereas, a Mutual Fund-Regular Plan is what you invest in, through an agent, broker or a distributor. When an investor invests in a Mutual Fund-Regular Plan, the mutual fund company is required to pay a commission to the intermediary. It is then recovered as an expense from the mutual fund investors. 

In mutual funds, the expense ratio is higher for a regular plan.

The Securities and Exchange Board of India (SEBI) introduced direct mutual fund plans in January 2013, which made it mandatory for all Asset Management Companies (AMCs) to provide an option to invest in mutual fund schemes directly, without the involvement of any third party.

What does this mean to you as an investor?

An investor can make approximately 1.5% higher returns by investing in direct plan mutual funds. 

How do Direct Plan Mutual Funds help an Investor?

Asset Management Companies (AMC’s) provide investors with two mediums to invest in Mutual Funds: Regular Plan and Direct Plan. The regular plans charge around 2.5% as annual management fee or in mutual fund terms, Expense Ratio, on the investment value. Of this, 1-1.5% is claimed as a commission by the agent or distributor, while the remaining 1% goes as a fee to the AMC. 

The direct plans have no reason to charge the agent commission of 1-1.5%, which enhances the returns of the investors. 

Which Mutual Fund plan is best suitable for me?

Regular and Direct plans are just the two options of the same mutual fund scheme, run by the same fund managers who invest in the same stocks and bonds. The only difference between the two is that in case of a regular plan, the AMC or mutual fund house is required to pay a commission to an intermediary as distribution expenses or transaction fee out of the investment made by the investors, whereas, in case of a direct plan, no such commission is charged. 

Instead, in case of direct plans, the commission is added to your investment balance, thereby reducing the expense ratio of your mutual fund scheme and increasing your return over the long-term. 

A high expense ratio eats directly into your returns and will reduce the wealth-creating potential of the fund.

So, as an investor, you must be wondering, how do I switch my investments from Regular Plan to a Direct Plan?

There are two options which would help you to switch from Regular Plan to a Direct Plan and maximize your return on investments. The first option is a  bit tedious, as it involves diluting all your investments in Regular Plan Mutual Funds and starting a fresh investment in Direct Plan Mutual Funds. 

The second option is quite simple. The Piggy Mutual Fund Application provides a Smart Switch option to all its users. Smart Switch allows users to switch from Regular Plans of any mutual funds to Direct Plans of the same mutual fund seamlessly.

Smart Switch is an algorithm developed by Piggy which prepares a smart schedule in order to optimize your returns. It prepares a schedule and provides you with a stipulated date, on which you can choose to switch your investment to Direct Plans without being liable to pay exit loads, and optimizes your tax savings. This option allows you to switch from Regular Plans to Direct Plans within a few minutes. 

Let’s take an example to help you better understand the Smart Switch function. Ankit is a 27-year-old investor who invests in 4 different SIP plans. Upon learning the difference between Regular Plan and Direct Plan Mutual Funds, he wishes to switch his investments. He learns about the Smart Switch function from his friend, Pratik. So, he downloads the Piggy app and opts for a Smart Switch on 26th Jan 2019. Smart Switch collects the history of investments and prepares the following Schedule:

Name of the Smart Switch User: Ankit
Fund Name   Date of Initial Investment Category Total Investment Exit Load (as per the fund) Fund Name – After Switch Switch Date
Axis Multicap Fund-Regular Plan 21/03/2014 Multi-Cap 260,000 1% will be charged for redemption within 365 days Axis Multicap Fund-Direct Plan 31/01/2019
BOI AXA Small Cap Fund-Regular Plan 29/09/2015 Small Cap 150,000 1% will be charged for redemption within 365 days BOI AXA Small Cap   Plan 31/01/2019
Aditya Birla Sun Life Tax Relief 96  – Regular Plan 15/12/2017 ELSS 78,000 0% Exit   Lock-in period for 3 years Aditya Birla Sun Life Tax Relief 96  – Direct Plan 22/12/2020
Invesco India Contra Fund-Regular Plan 15/05/2018 Equity – Value Oriented 12,000 1% for redemption within 365 days Invesco India Contra Fund-Direct Plan 22/05/2019

 

As you can see from the above illustration, the Smart Switch function helps the user, Ankit switch from Regular Plans to Direct Plans for his investments, and the entire switch was completed in a seamless manner. Smart Switch also took various other factors into consideration to ensure Ankit is not liable to pay an exit load or break the lock-in the period of his ELSS investments.

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