Direct Mutual Fund Plans From Nov 1: How to Switch Step by Step

According to reports in The Economic Times, SEBI is set to make direct mutual fund plans the default option from November 1. If you hold regular plans and want to move, you can do it yourself in a few steps, but the switch counts as a sale, so tax and exit load can apply. Whether it pays depends on your gains, your holding period and how big the fee gap is.

We have not seen the final SEBI circular, so this guide keeps the news part short and spends its time on what stays true either way: how the two plans differ, how to switch, and what the cost difference adds up to.

Key takeaways

• Direct and regular plans hold the same portfolio. The only real difference is cost: regular plans carry a distributor commission inside the expense ratio.
• Moving from regular to direct is treated as a redemption plus a fresh purchase, so capital gains tax and exit load may apply.
• In our example, a ₹10,000 monthly SIP over 10 years ends about ₹1.05 lakh higher in a direct plan, assuming a 0.8 percentage point fee gap.
• Direct plans suit people who are comfortable choosing funds and staying invested without hand-holding. Check the SEBI circular for the exact rule once it is published.

What is changing on November 1, according to reports?

The Economic Times headline says SEBI will make direct plans the default from November 1, and that it is also reviewing IPO and SME listing rules. The snippet we have does not spell out the mechanics. We do not know, for instance, how the default will apply to new investors versus existing holdings, or what happens when someone invests through a distributor.

So treat this as a reported plan, not a settled rule. Before acting, read the circular on the SEBI website and check your fund house's notice. Nothing in the reports suggests you must switch by a deadline, and we would not rush a sale because of a headline.

Direct vs regular mutual fund: what is actually different?

Both plans belong to the same scheme. Same fund manager, same holdings, same strategy. The plans differ in how they are sold and, therefore, in what they cost.

A regular plan pays a commission to the distributor or agent who sold it to you. That commission is built into the fund's expense ratio, which is deducted daily from the fund's NAV. You never see a bill. You just see a slightly lower NAV and return.

How big is the expense ratio gap?

It varies by fund category and size. For equity funds the gap is often somewhere between 0.5 and 1.5 percentage points, and it tends to be smaller in debt and index funds. You can find both ratios on each fund's factsheet or on the fund house website, listed separately for each plan.

Do not rely on a general number. Look up your own funds, because a fund with a 0.3 point gap and a fund with a 1.2 point gap lead to very different decisions.

What does the fee gap cost you over 10 years? A rupee example

Here is a simple illustration. Say you invest ₹10,000 every month for 10 years, which is 120 instalments and ₹12,00,000 in total. Assume the fund earns 12% a year in the direct plan after costs, and the regular plan earns 0.8 percentage points less, at 11.2%. Returns in real life are not fixed, so this only shows the effect of the gap.

We calculate with monthly compounding and month-end investments:

• Direct plan: monthly rate 1% (12% ÷ 12). The factor is (1.01120 − 1) ÷ 0.01 = about 230.04. So ₹10,000 × 230.04 = about ₹23,00,000.
• Regular plan: monthly rate 0.9333% (11.2% ÷ 12). The factor is about 219.53. So ₹10,000 × 219.53 = about ₹21,95,000.
• Difference: ₹23,00,000 − ₹21,95,000 = about ₹1,05,000.

You put in the same ₹12 lakh and the same market delivered the same gross return. About ₹1 lakh went to the cost layer instead of to you. The gap grows faster the longer you stay invested and the larger your corpus gets, because the fee is charged on the whole balance every year, not just on the new money.

Also note the reverse: if your balance is small, say ₹50,000, a 0.8 point gap is ₹400 a year. The case for switching gets stronger as your holdings grow.

Should you switch? A clear view

For most salaried investors who run simple SIPs in a few diversified or index funds and do not need someone to talk them through a market fall, direct plans make more sense. The portfolio is identical and the lower cost compounds in your favour.

Regular plans can still be reasonable if the distributor gives you real value: goal planning, rebalancing, and, most useful, stopping you from selling in a crash. If an adviser's coaching keeps you invested through a bad year, that can be worth more than 0.8% in cost. The question to ask is whether you actually get that service, or whether you simply have an old SIP that nobody has reviewed in years.

There is a middle route too. You can hold direct plans and pay a SEBI-registered investment adviser a flat fee, which keeps the advice visible and separate from the product. Check registration on the SEBI site before paying anyone. Our piece on smart money habits covers the wider routines that matter more than any single fee.

How to switch from regular to direct mutual fund plans, step by step

1. List every holding. Download a consolidated account statement (CAS) from MF Central or the registrars CAMS and KFintech. It shows each fund, plan type, units, purchase dates and current value.
2. Spot the regular plans. The plan name includes "Regular" or the scheme code shows it. Note the units and the date of each purchase.
3. Check exit load. Many equity funds charge about 1% if you redeem within a year of buying. Units held longer are usually free of it. Confirm in each scheme's document.
4. Estimate the tax. A plan switch is a redemption, so gains are taxable. Under rules as we know them, equity fund units sold after more than a year attract long-term gains tax of 12.5% on gains above ₹1.25 lakh in a financial year, while shorter holdings attract 20%. Debt fund rules differ. Verify current rates on the income tax portal or with a chartered accountant.
5. Open a direct account. Use the fund house website, MF Central, or a direct-plan platform. You need KYC complete, a PAN and a linked bank account. If your KYC is already done, this takes minutes.
6. Start the direct SIP first. Set it up in the same scheme, choosing "Direct" and the growth or IDCW option that matches your current one.
7. Stop the regular SIP. Cancel it through your distributor, the AMC or the registrar. Keep the confirmation. Skipping this step is how people end up paying both ways.
8. Redeem the regular units. You can do it in one go or in stages across financial years to use the annual tax-free gains limit. Then invest the proceeds in the direct plan.
9. Keep records. Save the new purchase dates and cost values, because the holding period restarts for the new direct units.

Some fund houses offer a plan-switch form that does this in one request. It is still taxed as a sale, so the form does not avoid anything.

A switch worked through: when it pays and when it does not

Say you hold regular units worth ₹5,00,000 that cost you ₹4,00,000, all held for over a year. Your gain is ₹1,00,000. If you have not used your ₹1.25 lakh yearly exemption on other equity sales, the tax on this gain would be nil under the rules we described, and the switch costs you only a little time.

Now say the gain is ₹3,00,000. Taxable gain above the exemption is ₹1,75,000, and at 12.5% the tax is ₹21,875. If the fee gap is 0.8%, saving on ₹5 lakh is about ₹4,000 in year one and grows as the corpus grows. Staging the sale across two financial years may bring the tax down, so it can be worth speaking to a CA before you decide. Check the rates, as they may change.

Common mistakes to avoid

• Selling everything in a rush because of the November 1 headline, then paying avoidable tax.
• Forgetting to cancel the old regular SIP, which keeps feeding the costlier plan.
• Switching a holding that is still inside its exit-load window without checking the 1% charge.
• Choosing a different scheme in the direct plan just because it looks better this year. Keep the same fund unless you have a separate reason to change.
• Treating direct as risk-free. Direct plans cut cost, not market risk.

Myth vs fact

Myth: Direct plans give higher returns because the fund manager performs better.
Fact: The portfolio is the same. Direct plans show a higher NAV only because less cost is deducted.

Myth: If SEBI makes direct the default, regular plans disappear.
Fact: The reports we have do not say that. Check the circular rather than assuming.

Is this the right time to rethink your whole portfolio?

A switch is a good moment to look at the basics. Do you have an emergency fund outside your equity funds, so you never have to redeem at a bad time? If you are also following the market news around listings, our guide to upcoming IPOs in India explains that side of the story. Reports mention SEBI reviewing IPO and SME listing rules too, but that does not change how you switch a mutual fund plan.

FAQ

Are direct mutual funds better than regular plans?

On cost, yes: the same portfolio at a lower expense ratio. On service, it depends. If a distributor gives you advice that keeps you invested and on track, regular plans can still be worth it. If you only bought a product and heard nothing since, direct is usually the better deal.

Will I pay tax if I switch from regular to direct?

Usually yes, if you have a gain. The switch is treated as a sale and a fresh purchase. If you are in a loss or your gains fall inside the yearly exemption, the tax may be nil. Confirm the current rates and your own position with a chartered accountant.

Can I switch within the same fund house without selling?

Not tax-free. Even if the fund house gives you a form to change plan, it is processed as a redemption and a new purchase in the other plan.

Do I have to switch by November 1?

The reports do not mention a deadline for existing investors, and we have not seen the final circular. Check the SEBI circular and notices from your fund house before you act.

Where can I buy direct plans?

On the fund house's own website or app, through MF Central, or on platforms that sell only direct plans. Make sure the scheme name says "Direct" before you confirm.

Bottom line

If you manage your own SIPs, direct plans give you the same funds for less, and the gap can reach a lakh of rupees over a decade on a modest SIP. Start this week by downloading your CAS and listing which holdings are regular, then check exit loads and gains before you sell anything. Read the final SEBI circular, and talk to a CA or a SEBI-registered adviser if your gains are large.