Switching from a regular to a direct mutual fund plan can save you 0.5-1.5% in annual expense ratio. Here is exactly how to do it, the tax impact, and what most investors get wrong.
If your mutual fund was sold to you by a bank, broker, or distributor, you are almost certainly in a regular plan. Regular plans charge a higher expense ratio — typically 0.5% to 1.5% more per year than the identical direct plan of the same fund — because part of that expense goes to the distributor as commission.
That difference sounds small. On a Rs 10 lakh investment growing at 12% for 20 years, a regular plan at 1.5% total expense ratio grows to approximately Rs 77 lakh. The same fund direct plan at 0.5% grows to approximately Rs 1.06 crore. The commission you paid silently cost you Rs 29 lakh.
What is the Difference Between Regular and Direct Mutual Fund?
Both regular and direct plans invest in exactly the same portfolio of stocks or bonds. The only difference is cost. A regular plan pays a trailing commission (typically 0.75%–1.25% per year) to whoever sold you the fund — your bank relationship manager, distributor, or online platform. That commission is deducted from the fund Net Asset Value every day before your returns are calculated.
A direct plan has no distributor in the chain. You buy directly from the AMC (Asset Management Company) or through a SEBI-registered investment adviser. No commission, lower expense ratio, higher NAV growth over time.
SEBI mandates that every mutual fund scheme must offer both plans. The underlying fund manager, portfolio, and investment objective are identical.
Tax Impact Before You Switch
This is what most investors ignore. When you switch from regular to direct, the tax treatment is identical to selling your regular plan units and buying new units in the direct plan.
For equity mutual funds:
- Units held less than 12 months: Short-Term Capital Gain (STCG) taxed at 20%
- Units held 12 months or more: Long-Term Capital Gain (LTCG) taxed at 12.5% on gains above Rs 1.25 lakh per financial year
For debt mutual funds (purchased after 1 April 2023): All gains are added to your income and taxed at your slab rate, regardless of holding period.
Practical tip: If your equity holdings are more than 12 months old, switch during April — the new financial year resets the Rs 1.25 lakh LTCG exemption. If gains are below Rs 1.25 lakh across all equity redemptions that year, you pay zero LTCG tax on the switch.
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ELSS funds: You cannot switch during the 3-year lock-in period. Wait until units are unlocked, then switch.
Step-by-Step: How to Switch Regular to Direct Mutual Fund
Step 1 — Check Your Current Regular Fund Holdings
Log in to MF Central (mfcentral.com) using your PAN and registered mobile number. This is the industry official consolidator, jointly operated by CAMS and KFin. You can see all your mutual fund holdings across all AMCs in one place, along with whether each holding is in a regular or direct plan.
Step 2 — Calculate Your Capital Gains
On MF Central, download a capital gains statement. Identify which holdings have long-term gains (held 12+ months). These are the ones to switch first — especially if total LTCG across all redemptions stays under Rs 1.25 lakh this financial year.
Step 3 — Stop Your Existing Regular SIPs
A switch only converts your existing units — it does not touch your SIP mandate. Log in to your broker platform or the AMC website and cancel the regular plan SIP. Confirm the cancellation at least 10 working days before the next SIP date.
Step 4 — Execute the Switch
Direct switch (preferred): Log in to the AMC website. Go to Transactions then Switch. Select the regular plan as source and the direct plan of the same fund as destination. Settlement takes T+3 business days for equity funds.
Redeem and reinvest: If direct switch is not available, submit a redemption of your regular plan units. After settlement (T+3), invest the proceeds in the direct plan via the AMC website or MF Central.
Step 5 — Set Up a New Direct Plan SIP
Once your lump-sum switch is complete, start a fresh SIP in the direct plan. You can do this on the AMC website, MF Central, or through Kuvera. Ensure you select "Direct" plan.
Platforms That Support Direct Plans
MF Central (free, government-backed), Kuvera (free, direct plans only), Groww (offers both — confirm you select direct), AMC websites directly. Avoid platforms that primarily offer regular plans — your bank investment portal almost always routes you to regular plans.
How Much Will You Save?
A difference of 1% per year on a Rs 5 lakh portfolio equals Rs 5,000 annually — compounding over 15 years, that is over Rs 1.3 lakh in additional corpus. Use the BullWiser Fund Analyser to compare the direct vs regular expense ratios for any specific fund before switching.
Also read: Is Direct Mutual Fund Better Than Regular Plan? Full Analysis | ELSS vs PPF vs NPS — Which is Better?