In 2012, SEBI had come out with several reforms which included the introduction of direct plans in mutual funds.

Starting January 1, 2013, every mutual fund in India comes in two variants – a Regular Plan and a Direct Plan.

Both the regular and direct versions of any mutual fund are the exact same fund, run by the same fund managers, who invest in the same stock and bond.

The difference is that in case of direct mutual funds, there is no broker/distributor commission. Which means, as an investor, you get higher returns from the exact same mutual fund.

Low-cost direct mutual funds are slowly gaining popularity, especially among HNIs and corporate investors.

However, many small investors are still stuck with high-cost regular plans.

This is largely due to the lack of awareness.

Even those who know that direct plans are cheaper, do not switch from regular, as they worry about exit load in the process of switching.

Let me assure you, you should not worry about exit load.

How does exit load work while switching from regular to direct?

Moving your existing investments from regular to direct essentially involves a switch.

A switch refers to a change in the scheme you are holding or just a change in the plan of the scheme.

When switching from regular to direct plan, the exit load criterion is applicable.

Therefore, if the scheme charges an exit load of 1% from the redemption of units held for less than a year, you will need to pay this charge on such units.

If you are investing in a regular plan via an SIP, the exit load period is calculated from the date of each monthly installment. Hence, you may need to make the switch, over a period to escape the exit load penalty.

Also remember, when you switch to direct plan, it is considered a new purchase.

Hence, the new exit load tenure will begin from the date of investment in the direct plan.

Why you should not worry about exit load?

Everyone should go with direct mutual funds. Period.

Investors would get higher returns in direct plans as compared to regular plans. The returns would be higher by around 0.5%-1% per annum depending upon the mutual fund’s expense ratio.

Moreover, you must remember that returns keep compounding.

Example: You invest in Rs. 1000 in a fund. In one year, that fund gives you an annual return 0f 10%, which means your investment values to 1100.

Therefore, next year, you will gain returns on Rs.1100 and not Rs. 1000.

In this way, the higher amount keeps attaining returns.

This can cause a huge difference in the long-term.

This is the most important reason why you should not worry about the exit load when switching to a direct plan. The difference in the accumulated wealth of direct and regular plan is too high to ignore.

Here’s a comparison between the returns from direct and regular plan of 3 mutual funds.

Also Read: How to switch from Regular to Direct Plan

For simplicity, I have taken an initial investment amount of ₹ 10,00,000 (lump sum) in all examples.

1. SBI Bluechip Fund

 Particular Direct Regular Difference
Initial investment amount ₹ 10,00,000 ₹ 10,00,000 0
Investment tenure 5 years 5 years 0
Avg. 5 Year Return 20.34 % 19.24 % 1.1 %
Final return amount ₹ 25,23,771.53 ₹ 24,10,515 ₹ 1,13,256.53

As seen from the above table, there is a difference of ₹1,13,256.53, between returns from direct and regular plan of this fund, with an initial investment amount of ₹10,00,000 for 5 years.

2. Reliance Top 200 Fund

  Particular Direct Regular Difference
Initial investment amount ₹ 10,00,000 ₹ 10,00,000 0
Investment tenure 5 years 5 years 0
Avg. 5 Year Return 19.69 % 18.63 % 1.06 %
Final return amount ₹ 24,56,344.84 ₹ 23,49,484.87 ₹ 1,06,859.97

As seen from the above table, there is a difference of ₹1,06,859.97, between returns from the direct and regular plan of this fund, with an initial investment amount of ₹10,00,000 for 5 years.

3. L&T Midcap Fund

   Particular Direct Regular Difference
Initial investment amount ₹ 10,00,000 ₹ 10,00,000 0
Investment tenure 5 years 5 years 0
Avg. 5 Year Return  31.99 % 30.92 % 1.07 %
Final return amount ₹ 40,05,946.5 ₹ 38,46,183.35 ₹ 1,59,763.15

As seen from the above table, there is a difference of ₹1,59,763.15, between returns from the direct and regular plan of this fund, with an initial investment amount of ₹10,00,000 for 5 years.

Conclusion

Everyone should go with direct mutual funds as the returns offered by the direct plan of a mutual fund will always be higher than the regular plan of the same mutual fund as seen from the above comparison of 3 mutual funds.

Investors who are currently investing in regular plans should switch to direct without any hesitation.

Though they have to pay an exit load over switch, the amount of money they will earn from a direct plan is way more than their regular counterpart.

Read more: Direct Plans Vs Regular Plans in Mutual Funds: Which Plan is Better for You?

Happy Investing!

Disclaimer: The views expressed in this post are that of the  author and not those of Groww