Why choose direct plans?

Direct plans have been around for more than a decade now. 10 years ago, we addressed our readers' questions about how direct plans might impact their savings. 10 years later, investors and readers already know enough about them.

Yet, regular plans account for 76 per cent of assets in diversified equity funds. Should this scenario change? Is there a case for direct plans? We explore.

Expense ratio
This is the first thing to consider. On an average, a direct plan costs you 1 per cent less by way of expense ratio . Now, while it may look like a small amount, the 1 per cent compounded in the long run can make a significant difference.

Tax implications
This is the second key factor, due to which sometimes investors hesitate in making the switch. So we also decided to explore the benefits of switching and how they outweigh doing nothing and staying with the regular plans.

Let's show you how to manage your taxes in case that's the only thing stopping you from making the switch. Remember,

• You will only be taxed on your long-term gains in excess of Rs 1 lakh each year. So, you can easily stagger the switching over a couple of years and limit the gains to Rs 1 lakh in each financial year.
  
• Now if you have an extensive portfolio, say you have been investing for over 10 years, then it may take many years to make the switch tax-free. In that case, we suggest you just take the tax hit and move on. We'll also show you the numbers to demonstrate how long it will take to recover the tax hit.
  
• Most importantly, don't forget the grandfathering clause wherein your gains up to January 31, 2018, are tax-free.

The power of switching: Worth it in the long-run
Now that you understand the two major factors in the switch - the 1 per cent and the tax implication, let's crunch some numbers.

Let's assume you had invested Rs 1 lakh in the regular plan of HDFC Flexi Cap Fund on August 1, 2013, and after 10 years, i.e., on July 31, 2023, you switched to direct plan.

Detailed calculation shows that you will be able to break even in around four years.

We also crunched a similar number, considering the initial investment amount was Rs 10 lakh. In that case, breaking even would take under seven years.

This table also clearly demonstrates how much difference the 1 per cent can make in the long run.

Similarly, with an initial investment of Rs 10 lakh, the difference after 20 years would be Rs 1.45 crore!

All you need to do to be wealthier is to take control of your investments wisely. So, what are you waiting for? Go on, and make that switch!

Suggested read: Direct or regular mutual fund: Which one should you invest in?

This article was originally published on August 09, 2023.