Every mutual fund scheme has two plans available to choose from- regular and direct. The difference between regular and direct plans is the expense ratio. Expense ratio refers to the cost which you pay to the mutual fund company for managing your money.
While some investors have direct plans, many investors have selected regular also. There are several criteria that determine whether you should convert from regular to direct. Let's first define regular and direct plans before we look at those.
Regular funds and Direct funds
Regular funds have a higher expense ratio since investment in a regular plan is done through a mutual fund distributor or advisor. A part of it is paid as commission or brokerage to the distributor for providing advice and other services to his/her customers whereas Direct funds have a lower expense ratio since investment is done directly with the AMC or through an RIA (Registered Investment Advisors). RIAs, a type of advisors who do not get any commission from the mutual fund company and are supposed to charge a fee from customers for giving advice and service.
The expense ratio differs in both plans. The expense ratio for regular plans can range from 0.05% to 2.00% while in direct plans, the expense ratio is lesser by 0.40% to 1.00% than regular plans in equity funds.
How to switch from regular fund to direct fund?
It can be done online or offline, both.
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Online
Log on to the website of the mutual fund. Visit the transaction page, where you can buy, change, or redeem your fund units. Select the ‘switch’ option and then click on the respective fund name. It will have a ‘Direct Plan’ option; click on it and follow the steps displayed. It will take about four working days to reflect the change.
Offline
If you choose to do the shift physically, then you could go to the nearest branch of the fund house and fill and submit a switch form. Enter the requested information, such as the folio number and the fund name. Once they process it, they will send you an updated account statement. You can even get this done via your intermediary.
Why shift from regular to direct?
Traditionally, investors could formerly buy mutual funds from distributors, banks, and independent financial consultants. In 2013, the Securities and Exchange Board of India (SEBI) introduced the ‘Direct Plan’. It has made it possible for investors to decide on their own investments. As a result, this action is recognised as the foundation of the mutual fund industry's reform.
The fact that direct funds don't require commission is one of their key draws. In the case of regular funds, the fund house increases the expense ratio by your advisory fees. Direct funds may be your best option if you are a sophisticated investor with a great interest in finance. Thus, many people only use outside brokers to invest in mutual funds out of convenience.
