How to go about investing in Direct Funds
Broadly, there are 4 ways of investing in Direct Plans of a Mutual Fund:
- You can directly fill up the application form and submit it to the AMC office. Ensure to click the “Direct Plan” box while applying before submitting the form. Once you have applied and got the Folio Number, subsequent transactions can also be done online. For each AMC, you need to get a unique folio number which can be quite cumbersome to handle all by yourself.
- You can also buy Direct Plans through mutual fund aggregators. These funds offer an online platform. When you register with an aggregator, you need to go through the KYC and will be allotted a unique Common Account Number (CAN). Again, remember to select “Direct Plan” as your preferred choice in this case.
- The third way to apply for Direct Plans is to go through the website of the mutual fund registrars. The two principal registrars in India are CAMS and Karvy and they manage almost all the leading funds between them excepting Templeton and Sundaram BNP which rely on in-house registry. Typically, the registrar will only offer Direct Plan access to the AMCs where they are the registrar. This is the limitation of going through the registrar route.
- Additionally, there are registered investment advisors who facilitate buying Direct Plans of mutual funds and offer additional advisory services for a fee.
Shifting from a Regular Plan to a Direct Plan
One common question that existing investors ask is whether they can convert their Regular Plans into Direct Plans. That is perfectly possible but here are 3 points to remember.
- You need to fill up a switch form and submit the form either online or physically at the AMC office. Please note that a switch is treated as a sale and purchase transaction. Hence any exit load, if applicable, will be charged on the regular plan.
- Since the switch from Regular Plan to Direct Plan is treated as a fresh sale and purchase, it will also be subject to capital gains tax depending on the period of holding. While STCG is taxed at 15% in case of equity funds, even LTCG is taxable at 10% above Rs.1 lakh per year effective April 2018. That impacts your effective returns.
- A switch will not be permitted in case of locked-in funds. For example, if you have already opted for a Regular Plan of an ELSS, you cannot switch to a Direct Plan till the 3-year lock-in period is completed.
What is the bottom line?
Direct plans help you to save costs and there are multiple ways to invest in these Direct Plans. The only thing you need to keep in mind is that you are losing out on the advisory services and the entire decision onus falls upon you. If you are ready for that then Direct Plans are a good idea.