How to Invest in, or Switch to Direct Mutual Fund Plans

Here is a set of instructions for regular mutual fund investors to switch to direct mutual fund plans, and for first time investors to buy direct mutual fund plans. If you have already done this, please check if I have missed out anything and if you think this is useful, forward it to others who might benefit from it.

To be frank, the steps are quite self explanatory once we navigate to the AMCs  site. However, I find there a lot of questions on this and I write this following suggestions at FB group, Asan Ideas for Wealth.

What are direct mutual fund plans?

These are plans in which no trail commission to paid to distributors from the NAV of the mutual fund. Hence these funds have a higher NAV than regular funds which are sold by distributors.  Since investing in direct plans can result in a significant difference in corpus, it is a no-brainer  to do so.

See: Direct Mutual Fund Option – The Second Anniversary Report

Carpe-diem
Source: www.keepcalm-o-matic.co.uk

I am regular mutual fund plan investor. How do I switch to direct plans?

1) Never ask your offline or online distributor if they would offer direct plans. They would be dumb to do so. Besides , you do not ask a barber if you can cut your own hair. You buy your own hair clipping machine and get on with it.

2) You need to visit the AMC's website and locate the invest online button. That is what direct means. No intermediaries.

3) AMCs give you two options. (A) You can simply invest a lump sum or set up an SIP online or (B) you can register your existing folio with them.

Obviously existing investors should choose (B) and new investors should choose (A)

Once you get your account with them, you can see your current folio and existing investments. You can then proceed to buy direct mutual funds to switch regular fund units to direct fund units.

4) Before switching, you can consider using this mutual fund capital gains calculator  and find out, how many units are free from exit load, more than 1Y old (for equity funds), and free from lock-in (for ELSS funds). You can then proceed to switch the free units to direct plans in one shot. You can switch the remaining units from time to time.

5) If you have existing SIPs in regular plans, you will need to stop them and start SIPs in direct plans. The procedure for this varies from AMC to AMC. So please check with them.

 

I am a first time investor. How do I invest in direct plans?

There are two sub-categories here.

First-time investor to mutual funds. or

First-time investor to a particular AMC

Let us look at them one by one.

First-time investor to mutual funds

The first step is to complete Know Your Customer (KYC) Formalities.

To the best of my knowledge this is a one time process. If you are KYC compliant with one AMC, you are KYC compliant with all of them.

1 Download the KYC application form for individuals from here (this is from Franklin Templeton. KYC forms are independent of AMC)

  1. Fill it up (duh!)
  2. Attach the documents specified therein with attestation
  3. Submit the form at any AMC or CAMS investor service centres or collection centre. You can get the list of CAMS locations here and the list of all AMC branches here

My understanding is that in person verification (IPV) is mandatory for KYC. Meaning  you will have to go the branch and not send it by courier. If you feel comfortable, go to the AMC branch where you would like to invest first. They can guide you further if necessary.

  1. Wait for the KYC acknowledgement post. Franklin says they send this. Not sure about other AMCS. Dont think CAMs will do this. In any case, you can verify your KYC status after a few days here
  • KYC validation is done via PAN.  So you don't have to wait. After a few days,just go to the AMC and try investing online with your PAN. If the AMC lets you invest, you are KYC compliant. Simple as that.
  • As noted at Asan Ideas for Wealth, choose only online banking option and not the NEFT option.
  • In a couple of days you will get the account statement with a folio no.
  • Use the folio no. to get an online account. See pdf files above.

That is it! You are now KYC compliant across all AMCs and you can invest online in direct plans in any other AMC, following the simple instructions on the site.

First-time investor to a particular AMC

  1. Go to the AMCs invest online page
  • Make a transaction. Some allow you to even set up SIPs.
  • Wait for the folio to be created.
  • Use the folio to get an online account.

Note:  HDFC AMC does not allow you to invest online without a folio no. All other 'major' AMCs allow you to invest online if you are KYC compliant.

Acknowledgements: Pratheek John and Mahesh Kay who suggested something like this be written and all participants of this AIFW thread This link will work only if you are logged into FB and are a member of Asan Ideas for Wealth (AIFW).

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55 thoughts on “How to Invest in, or Switch to Direct Mutual Fund Plans

  1. nivesh

    Query - I have one ELSS mutual fund SIP through a broker. Now I would like to switch to direct mode. So shall I stop SIP through broker and and restart again or is there a way to get the broker out?

    Reply
    1. freefincal

      Do not contact your broker in this regard. Get an account with your folio no from the AMC as mentioned above and then you switch existing units to direct plan, stop or shift your SIP (check with the AMC in this regard)

      Reply
  2. nivesh

    Query - I have one ELSS mutual fund SIP through a broker. Now I would like to switch to direct mode. So shall I stop SIP through broker and and restart again or is there a way to get the broker out?

    Reply
    1. freefincal

      Do not contact your broker in this regard. Get an account with your folio no from the AMC as mentioned above and then you switch existing units to direct plan, stop or shift your SIP (check with the AMC in this regard)

      Reply
  3. Rakesh J Shah

    Sir,
    There are two aspects while switching from Regular to Direct Fund i.e. (1) Capital Gain Tax (Nil for equity MF after 1 year) (2) Exit Load (varies from fund to fund).
    Switching from Regular to Direct MF is considered as REDEMPTION and will be subjected to both capital gain tax and exit load if any.
    Now suppose for eg. an regular equity MF Scheme that i have invested has Exit load of 2% upto 365 days and 1% upto 730 days. If i apply for switch to direct MF under same scheme after 1 year of holding the units then i may not have to pay any capital gain tax (Nil), however will have to pay the exit load of 1%.
    So, do you advise to switch to direct fund immediately after 1 year and bear 1% exit load or to wait for another year and pay Nil exit load.
    Is the Factor to be considered is difference in Expense Ratio between regular and direct fund ?
    If the difference is more than the exit load than it would be more beneficial and if its not then is it better to wait?

    Reply
  4. Rakesh J Shah

    Sir,
    There are two aspects while switching from Regular to Direct Fund i.e. (1) Capital Gain Tax (Nil for equity MF after 1 year) (2) Exit Load (varies from fund to fund).
    Switching from Regular to Direct MF is considered as REDEMPTION and will be subjected to both capital gain tax and exit load if any.
    Now suppose for eg. an regular equity MF Scheme that i have invested has Exit load of 2% upto 365 days and 1% upto 730 days. If i apply for switch to direct MF under same scheme after 1 year of holding the units then i may not have to pay any capital gain tax (Nil), however will have to pay the exit load of 1%.
    So, do you advise to switch to direct fund immediately after 1 year and bear 1% exit load or to wait for another year and pay Nil exit load.
    Is the Factor to be considered is difference in Expense Ratio between regular and direct fund ?
    If the difference is more than the exit load than it would be more beneficial and if its not then is it better to wait?

    Reply
  5. JD

    Great,
    Actually i have gone through this when first Direct plans introduced in Jan 2013.
    Well, Any one who has invested online in amc before Jan 2013, was automatically switched over to Direct MF by AMC itself.
    Note:
    whenver you are switching sip, First start new SIP in direct plan and then only switch your existing SIP in new one. If not done this way, you will have multiple folios ( i had in franklin and hdfc )

    If you are first time investor , then you should start with MFUtility . ( What do you say sir? )

    Thanks & Regards
    JD

    Reply
    1. bharat shah

      @JD
      'Well, Any one who has invested online in amc before Jan 2013, was automatically switched over to Direct MF by AMC itself.'
      as far as i am concerned , though almost of my mf investments were done online directly before Jan 2013 , but none was switched to direct plans introduced wef Jan 2013 automatically. i had to switch all by myself and paid STT as applicable, though i took care for no exit load.

      Reply
  6. Karthikeyan

    Thanks for the valuable article. Another option is for those who have enabled mutual fund investing through their bank account (Ex: HDFC Bank), they can use the same to make a minimum investment to generate a folio number with the AMC and then create an online account.

    Reply
  7. Shilpa Wagh

    Hi Pattu, Nice Article. I am searching for a platform where I should have access to all AMCs direct plans. That makes life simple. I enquired with MF Utility but they have system only for ARN holders and nor for RIAs. Can you suggest some platform?

    Reply
  8. K V PRAKASH

    I have seen direct plans of many AMCs to purchase online. Most of them are very user friendly, even though the checks and balances regarding "forgotton password" etc. are lengthy. But I found HDFC MF to be the worst AMC in terms of online purchase of direct plans. There mechanism is not at all user friendly & I get the feeling that they are actually discouraging direct plans. Is there any mechanism of complaining about this to any authority or in on any matter relating to purchase of direct plans in case of problems?

    Reply
      1. Kartik Rao

        I agree, HDFC MF seems to be the worst of the lot... and indirectly try and force investors to go through the regular route..Reading this thread, I was inspired enough to register online(direct) on different AMC websites,but then HDFC MF throws up this particularly frustrating error after submitting all the details---"There is no row at position 0"..
        So what I am now opting to do is close my SIP through the regular route and shift to another fund/fundhouse...
        Hope this serves them fine and also as a wake up call...It's their loss...

        Reply
  9. S.Singh

    ICICI Direct offers a facility for Transferring-In MF Investments. If I transfer in a Direct Fund (Inlcuding SIP) does that change the type of investment from Direct.

    I prefer having all my investments in the same platform so that I can get a quick snapshot of all the investments.

    Is there any other way?

    Reply
  10. Jeethendra

    Taxation Question:
    Assume i was doing an SIP for last 5 years and wanted to swtich to direct mode. I have accumulated X Units in First 4 years and 50 units on last one year. I would like to redeem X Units and move to direct. If i redeem now, how can we separate first X shares? Is it fine, till we have 50 Unit or special care needs to be take care? Hope it wont be considered, short term trade and taxed for 50 units out of X units. Please advice

    Reply
  11. chandan kumar

    As when I switch from regular to direct, I have lump sum purchase of direct mutual fund in stead of SIP.

    1. So is there any monetary loss in switching?
    2. Do we will have SIP magic/advantage still hold true with my lump sum purchase along with new SIP?

    Thanks

    Reply
    1. freefincal

      No loss. The folio is just the same. SIP has no magic or advantage for the current value that you have. It only averages entry of future installments. That will obviously happen in direct as well.

      Reply
  12. Arul Selvan

    MFU portal allows you to open one account which can be used to invest direct to many (participating) mutual funds with one cheque. No need to open individual accounts with each mutual fund. I have opened an account. But, they are yet to start online transactions. Only offline (filling forms) is available now. Online will start in two months. This is a very convenient option for all.

    Reply
    1. freefincal

      Yes it is and I have written about this, but one need not wait for that. All we need is a few accounts from a established AMCs and we can manage with that.

      Reply
  13. Tabish Nadeem

    Sir could u plz guide me as I have purchased some MFs through my icici demat a/c but i dont know whether they r direct or not....my question is whether d mf purchased through demat a/c are already in the direct category??

    Reply
  14. P

    @Tabish,

    I suppose, you can have MF units held in d-mat account in direct mode also, but MF unites purchased through ICICI Direct(broker) are not direct, ICICI direct acts as broker for you and they are regular units.
    You can also check if its regular or direct by scheme name. Direct schemes always mention keyward "Direct".

    Reply
  15. Abhay Taneja

    Hi Pattu,

    I have one query regarding this.
    Suppose, I have been investing the regular plan of AMC from the last 4 yrs. Now, if I intend to switch it to the Direct plan. Will it not loose it's power of compounding? This is because when I contacted SBI AMC customer care and few others, they all told me that I need to start all over again in the Direct Plan of same scheme, they cannot shift the amount or units from regular to Direct Plan.
    Please highlight if this is true or not.

    E.g:
    Current Scheme is: "SBI Emerging Businesses Fund - Regular Plan - Growth"
    Want to switch all units to: "SBI Emerging Businesses Fund - Direct Plan - Growth"

    Thanks,
    Abhay

    Reply
    1. Arul Selvan

      Dear Abhay,

      It is a completely wrong advice by the AMC. They are advising this so that they can continue to pay high commission to the agents. I will explain the possible scenarios:

      1.Lump Sum investments : If you allow it to continue, you will continue to lose money every month as you will be paying the commissions as long as you remain invested. Solution : wait for the zero exit load period (usually after one year in equity or 3 years in debt) and redeem. As soon as you get the money, invest in the same fund or a better fund with any AMC in direct scheme. You may lose the interest for a few days only. You will be saving a lot of money in the long run.

      2.SIP : Please stop the regular SIP. Redeem all the units which are eligible for zero exit load. Wait for some more time to redeem the balance units (till they reach zero exit load). As soon as you receive the redemption money, invest in any direct scheme (as lump sum). As soon as your normal SIP is terminated or even before it is terminated, you can start a fresh direct SIP (preferably online) in any scheme of your choice in any AMC of your choice.

      It is completely wrong to say that you will lose the power of compounding if you terminate a SIP and restart in Direct mode. You will only gain by doing it.

      I run my SIP for one year only. I keep on adding a new SIP (in the same or different scheme) once in 3 months (also for one year). This way, my bad performing funds get dropped automatically. Remember to select a fund which meets your risk profile.

      Hope I made the point clear.

      Reply
  16. sambhaji

    Suppose i have created folio in icicidirect for HDFC liquid fund, then i will open online account at HDFC MF site by using above folio number and in that foilo i will buy new direct plan hdfc funds...
    Is it possible??

    Reply
  17. avi

    I am a new investor. Recently , I made a lumpsum investment in dspbr 25 direct. However, I would like to change it into an SIP. Is this possible? How?

    Reply
    1. freefincal

      You start a SIP in the same fund, same folio. It should be possible to do this online (I have not done it personally though)

      Reply

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