Normal mutual fund schemes are costly due to the recurring charges incurred on them. These charges include agent commissions, distributor fee, management fee, registrar fee, as well as the expenses on selling and promoting. Due to these costs, the Net Asset Value (NAV) of the fund does not go up to the level that one expects. More the expenses, more will be the deduction in the NAV and your overall return. In a bid to soothe the investors from such soaring expenses, the Securities Exchange Board of India (SEBI) brought reforms in the mutual fund industry in 2013 with the introduction of Direct Mutual Fund Schemes.
Direct Mutual Fund Schemes are plans where you do not have to pay distribution fees, transaction fees, trail fees and other charges as you can buy the fund directly from the Asset Management Companies (AMCs) without any involvement of intermediaries like agents, distributors, etc. As a result, these schemes have lower expense ratio and offer higher NAV compared to the regular ones. These schemes are increasingly adopted by corporate, high net worth individuals and even retail investors.
How can you invest in Direct Mutual Fund Plans?
- You can visit the websites of mutual fund houses to buy Direct plans. When you go online, you will find two options-direct and through distributor. Click Direct to buy the Direct Plan
- You can invest in such plans through MF Utility
- Offline users will have to tick the option Direct Plan in Mutual Fund Investment Moment you do it, the agent or the distributor of the scheme won’t receive any commission even if he/she puts his/her ARN code.
- If you do not see Direct Plan option in the application form, then you can mention DIRECT in the ARN column.
ARN stands for AMFI Registration Number. Mutual fund agents and advisors are identified through ARN code.
How to switch from regular to Direct MF plans?
You need to choose the option Switch if you want to convert your regular mutual fund plans into direct ones. For this, you must submit switch request to the concerned mutual fund house, which will then convert your regular plan into direct plan.
Exit load & taxes
Switch from regular to direct is viewed as normal redemption and thus applicable exit loads will be charged. In addition, capital gain tax, as applicable, will be charged. But, if you have made an investment in regular fund not mentioning any distributor code, you can then get free from paying exit load at the time of switching to Direct.
Except exchange traded funds (ETFs), every regular plan can be switched to direct. If you want to convert the regular Equity Linked Saving Scheme (ELSS) into a direct plan, then you will have to wait till the completion of its lock-in period.