How to Shift a Mutual Fund SIP from a Regular to Direct Plan

Let us first take a look at what the Securities and Exchange Board of India (SEBI), the regulator of stock markets in the country, did in 2013. It made sure every mutual fund house introduced direct plans for all mutual fund schemes five years back.

This meant that every mutual fund was now of two types —regular and direct. While the regular mutual fund SIP plan includes a commission to be paid to brokers, the latter, newer offering did away with such a practice.

So this basically means that perhaps the only reason someone would want to switch from a regular mutual fund plan to a direct mutual fund plan is to save on the commission paid and perhaps get a negligent increase on returns.

Make Use of SIPs

Investors looking to shift can also do so for the Systematic Investment Plan (SIP), even if this started before the direct plan introduction date of January 1, 2013, under a supplier code. Under a regular plan SIPs can be converted into a direct plan for the remaining SIP installments, that too under the prevailing terms and conditions that were set during SIP registration.

But Why Change to Direct Mutual Funds?

Firstly, these plans can be brought straight from the funding organization, which means bypassing the distributor. This saving that is made on investor commission is instead given to investors as a lower expense ratio. Which means that while everything remains as it is, the returns on the SIP direct plan will be marginally higher (at a maximum of 2 per cent) than a regular SIP plan.

How to Make the Switch?

There are three ways to make a submission for a SIP plan change:

1. The easiest way is to submit a written request to the Asset Management Company or Investor Service Centre.
2. This request must include details like the scheme name, folio number, details of the holder and a signature of the investor.
3. Normally, there is a prescribed standard form for conversion provided by AMCs.
4. It must be remembered that the request must be submitted at least 15 days before the next installment is due.
5. In the case there is any other installment, it will be processed under the earlier plan.
6. Once the AMC receives the receipt, it will take between three to four weeks to process the conversion request.
7. If one has online transaction options for mutual funds with an Asset Management Company things will be different.
8. Login to your mutual fund account.
9. Find the transaction page where you can purchase or redeem funds, and under the switch tab, choose the fund name you want.
10. Select the option with the Direct Plan suffix.
11. It may take four days to process, so log-in four days later to check the status.
12. In one doesn’t have online access:
13. Visit the mutual fund office.
14. Ask for and fill out the switch mutual fund form.
15. Fill in required details (mostly same as point 1)
16. Sign and submit it.
17. An account statement will be generated via registered mail ID once the process is completed.
18. If registered to a distributor/broker:
19. In this case, switch will not be possible, as one has to activate online transactions or process though forms.

Know When to Make the Switch

There are some things one should be aware of before going for the SIP switch. It is always advisable to change your SIP mutual fund from regular to direct only if it is a long-term investment with a minimum of five years for a substantial amount. There are also two kinds of costs involved in switching to a direct plan:

1. Exit Load: It is the charge for redeeming the mutual fund before ideal redemption time. For equity-oriented funds, it is normally charged at 1 percent, while for debt-oriented funds, the exit load is anywhere between 0 and 2 percent, and dependent on the type of fund. So it is essential to ensure your fund does not have any exit load.
2. Taxation: Regular capital gain taxation can also be applied to the switching of funds. With equity-oriented funds, if a switch is made one year after holding the investment, then it is tax free, but if done prior then there will be a 15 per cent tax. For debt-oriented funds, if switched before three years, tax charged will depend on tax slab, and if done after three years, there will be a 20 percent tax charge with an indexation benefit.

Things to Remember

1. After the conversion of the SIP plan, all future reinvestments will come under the direct plan.
2. The switch will still come under redemption, so capital tax gains can be applicable.