Summary - Mutual funds offer direct and regular plans. Direct plans have lower expense ratios, leading to higher long-term gains. Even a 1% cost difference can create a gap of over ₹15–20 lakh on a ₹10 lakh investment over 20 years, showing how lower costs significantly boost returns through compounding.
Switching from a regular mutual fund plan to a direct plan is a decision many investors consider once they become more confident in managing their portfolios. While both plans invest in the same underlying fund, the key difference lies in the expense ratio—the fee charged for managing your money. Over the long term, even a 1% difference in expenses can significantly impact your total returns due to compounding.
This article explores the financial impact, tax implications, and key considerations of switching from a regular plan to a direct plan, helping investors make an informed decision that aligns with their long-term wealth creation goals.
Mutual funds have two plans: direct plans and regular plans.
People buy Direct Plans from a mutual fund company directly. Moreover, expenses in these plans are lower since there are no intermediaries such as mutual fund distributors.
Regular Plans are purchased through intermediaries such as mutual fund distributors, brokers, or advisors. These intermediaries receive a commission (also called trail commission or distribution fee) from the fund house. As a result, the expense ratio of a regular plan is higher, and this additional cost is indirectly borne by the investor to cover the distributor’s commission.
Every year, the percentage of your investment that goes to the fund’s management is what the expense ratio represents. This consists of management fees, administrative fees, and any other operational expenses. A higher expense ratio, therefore, means that part of your money goes towards these expenses, reducing the investment value.
Even though a 1% variation does not sound significant, over the years it tends to be significant, for example, if you compare returns from the Regular and Direct plans of the Value fund as shown in the table below.
Let’s assume an initial investment of ₹5,00,000, and only the expense ratio differs (Regular vs Direct).
| Tenure | JM Value Fund Returns - Regular Plan | Regular plan Total Value | JM Value Fund Returns - Direct Plan | Direct Plan Total Value | Difference in Investment |
| 1 Year | -1.69% | ₹ 4,91,550 | -0.44% | ₹ 4,97,800 | ₹ 6,250 |
| 3 Year | 23.82% | ₹ 9,49,167 | 25.13% | ₹ 9,79,613 | ₹ 30,446 |
| 5 Year | 25.51% | ₹ 15,57,262 | 26.64% | ₹ 16,28,638 | ₹ 71,376 |
| 10 Year | 16.68% | ₹ 23,38,483 | 17.80% | ₹ 25,72,900 | ₹ 2,34,417 |
| Since Inception (28 Years) | 16.41% | ₹ 3,52,12,601 | 17.15% | ₹ 4,20,48,858 | ₹ 68,36,257 |
In 28 years, the difference between regular and direct plans would result in a differential of ₹68 lakhs. This shows how the cost of deviation in fund value can affect an investor over time.
The fund is not a recommendation, it is just used for illustration purposes.
When you switch from a regular plan to a direct plan, the transaction is treated as a redemption and reinvestment.
This means you pay capital gains tax on the profit earned so far.
| Fund Type | Holding Period for LTCG | Tax Rate |
| Equity Fund | > 1 year | 12.5% on long-term gains above ₹1 lakh (no indexation), (₹1.25 lakh exemption) |
| Debt Fund | Any period (post-April 2023) | Taxed as per income slab (no indexation) |
Suppose you had invested in JM Value - regular plan (equity) as given above ₹5,00,000 has grown to ₹23,38,483 before switching.
Capital Gain = ₹18,38,483
Taxable Gain = ₹17,13,483 (after ₹1.25 lakh exemption)
Tax Payable = ₹2,14,185 (12.5% of Taxable Gain)
You then invest ₹16,24,298 (after-tax) into the direct plan. Despite the one-time tax, your long-term gains from lower expenses in the direct plan generally outweigh the tax cost.
| Particulars | Regular Plan | Direct Plan |
| Value of Investment (Today) | ₹18,38,483 | - |
| Tax Liability on Switching to Direct Plan | - | ₹2,14,185 |
| Value of Investment After Tax Liability | ₹18,38,483 | ₹16,24,298 |
| Returns (CAGR % p.a.) | 16.68% | 17.80% |
| Value of Investment After 5 Years | ₹39,73,133 | ₹36,95,260 |
| Value of Investment After 20 Years | ₹3.84 crore | ₹4.14 crore |
The direct plan incurs an immediate tax liability amounting to ₹2.14 lakh, which makes its initial investment ₹16.24 lakh and causes the direct plan to lag by a value of ₹2.14 lakh compared to the regular plan.
Fast forward, after 5 years, the direct plan underperforms the regular plan due to its higher initial investment than the direct plan. However, over a period of two decades, choosing the direct plan pays off handsomely. With the direct plan, your investment could swell to ₹4.14 crore, outshining the regular plan's ₹3.84 crore. That is a stunning outperformance of ₹30 lakh, due to a lower expense ratio.
When thinking about switching from one type of mutual fund plan to another, there are several important things to take into consideration. This includes an exit load, which is a particular charge that is equivalent to a certain percentage of the Net Asset Value (NAV) and imposed on redemption within a given period on one’s units.
In addition, there are some mutual funds such as Equity-Linked Savings Schemes (ELSS), that have a lock-in time that makes it impossible for individuals to move their investments from the regular plan to the direct plan.
Another crucial factor to remember is the capital gains tax that will be charged while cashing out your investments. You can lower this by moving your investment from the regular Plan to the direct plan gradually over, say, 12-15 months. Moving gradually will help reduce the effect on your capital gains tax. Besides, this could also help you transfer when the market is bearish. This approach may be helpful because it could help to cushion some of the capital gains.
Remember that exit loads, lock-in periods, and taxes might differ for investments made through Systematic Investment Plans (SIPs). SIPs treat each installment as a unique investment when considering these aspects, which is especially crucial in funds with lock-in periods.
Considering the potential for higher returns and cost-efficiency, transitioning from regular to direct mutual fund plans could be financially beneficial. However, it is crucial to factor in associated taxes, exit loads, and any applicable lock-in periods before making the switch.
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