Switching of Mutual Funds - Direct plan to Regular plan

Switching of mutual fund schemes means a change from a direct plan to a regular plan, a growth plan to a dividend plan in the same fund. Switching of mutual fund means to change the mutual fund option. There is this concept of buying and selling, switching makes this change in the option simpler. It is important to know the cost & process associated with it and then take an informed decision.

It is important to note that one can switch from regular to direct plan but vice-versa is not permitted. However, growth to dividend and vice versa can be done.

We have discussed on what is the process to switch between direct to regular plan or a growth plan to dividend plan.

How to switch?

If you are registered for online mutual fund transaction with individual AMCs –

  1. Login to your mutual fund account. The account can be either online transaction facility provided by individual mutual fund house or through direct online mutual fund platforms provided by CAMS, KARVY, MF Utility etc.
  1. Go to transaction page which allows you to purchase/switch/redeem fund. Choose the switch option and select from the ‘switch from’ drop-down the fund name you want to switch.
  1. Select the same fund name in the ‘switch to’ option and make sure the fund name has ‘Direct Plan’ written at the suffix.
  1. Re-login after four days to check if the switched investments have ‘Direct Plan’ as suffix.

If you don’t want online access

  1. Visit the mutual fund office.
  2. Ask for common transaction - Switch form.
  3. Fill in the required details with folio no. and the right fund name.
  4. Sign and submit the same.
  5. You will receive an account statement to your registered email id after the switch is processed.

If you are registered through broker/ distributor /demat form

The switch to direct fund won’t be possible if investor has transacted from online platforms such as ICICI Direct, Funds India, Birla – Myuniverse etc. or held mutual fund in demat form. One needs to activate online transaction at individual AMCs OR process it offline through forms. Both the ways are explained above.

                                                               Switching between mutual funds can get you gains if done properly otherwise the costs are too high to opt for the same.

The cost of Switching Funds

Even though the fund value is switched to the same fund, such transaction (change from regular to direct) is considered as selling of old investment and buying new ones and would be charged accordingly. Two main costs involved are to be considered while switching of mutual funds.

  1. a) Exit load – Exit load is the charge of redeeming the mutual fund prior to the ideal fund investment horizon. For equity-oriented funds, this is typically charged as 1 percent of the redemption value if redeemed before one year of investment and no exit load thereafter. For debt oriented funds, the exit load ranges from 0-2 percent and depend on the type of fund. Thus, to avoid such charges, one must ensure that the fund has no exit load or hold on to the fund till there is no applicable exit load.
  1. b) Taxation – Switching funds will have tax implications which are as per regular capital gain taxation. With the change in tax laws, for equity oriented mutual funds, now after 1 year, long term capital gains tax rate of 10% will be levied on the gain amounts more than INR 1 lakh and if done prior, the gains will be taxed at 15 percent or as per slab rates.

In case of debt funds, short-term gains i.e. of less than three years holding period will be taxed according to the tax slab and if switched after three years of holding, the gains will be taxed at 20 percent with indexation benefit.

The cost associated with switching funds would also remain same in case of any kind of switching.

When to switch?

The switch should be made only when you are looking at long term investments (investing spanning for more than 7 years). The cost associated with the switch is not worthy for short term investments.

You must only go for a direct mutual fund option when you are sure that you would be able to manage your portfolio and your investments. Growth or dividend option depends on your requirements, where you need some money on regular intervals you may opt for dividend option, otherwise, growth is always preferable option.

A few points to note

  • In case an investor wishes to switch current SIP investment in to a direct plan, the investor needs to stop the SIP and restart it in a direct fund. For SIP do not go for switching.
  • It is recommended that the accumulated amount should be switched only if there is no exit load or tax involved (switch upto gains of 1 lakh each year). Do your cost benefit analysis before taking that decision.
  • Investor can verify if fund has been switched to direct plan/growth plan/ dividend plan once the new account statement has the terms written as a suffix to the fund name or other name into which it is made.

Also, it is important to communicate with your advisor if you have a considerable investment in your long-term portfolio. As discussed many times, a genuine financial advisor will surely promote and help you with the process of switching to direct plan if he/she places client’s interests first.

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