Can I switch regular plan of an ELSS fund to direct plan?

IF you are looking to switch your ELSS MF units from Regular to Direct plan, here is what you should know…

Can I switch regular plan of an ELSS fund to direct plan?

ELSS mutual funds have a mandatory lock-in period of 3 years. You can switch from the regular plan of an ELSS mutual fund to the direct plan after the lock-in period of 3 years. This means that switches and redemptions are not permitted before 3 years.

Direct plans offer higher returns because they have lower expense ratios, this is because direct plans are direct to clients and there is no commission to be paid to MF Distributor. Therefore switching from regular plans to direct plans boosts your portfolio returns.

Let’s take a closer look at what ELSS mutual funds are and how they work:

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What are ELSS mutual funds?

ELSS mutual funds invest in the stock market and help investors to save tax. They qualify for a tax deduction of up to Rs.1.5 lakhs per year under Section 80C of the Income Tax Act.

There are many tax-saving investments but ELSS is the best option for creating wealth. ELSS funds invest in equities, which provide much higher returns in the long run. Other tax-saving investments struggle to beat inflation.

Another major advantage is that ELSS funds have a lock-in period of only three years. This is much less than other investments that qualify for Section 80C tax deductions.

The downside is that ELSS mutual funds are volatile and exposed to market risks. However, experienced fund managers backed by research teams manage ELSS funds.

Also read: Top 5 ELSS Mutual Funds to invest in 2018-2019

What’s the difference between mutual fund regular plans and direct plans?

Before 2013, mutual funds only had regular plans with built-in distributor commissions. Regular plans are for people who invest through mutual fund distributors.

Direct plans commenced from January 1, 2013. They are for people who want to invest in mutual funds themselves. Distributors have no role to play in direct plans and there is no distributor commission.

As a result, direct plans have expense ratios that are around 1 to 1.5% lower than regular plans depending upon the type of the fund. This can increase portfolio returns and with compounding effect in the long run there could be a significant positive impact.

The downside is that you will not get any handholding and advice from a distributor. Direct plans may suit you if you believe that you can manage your investments yourself. If you lack the time or inclination to do it yourself, you can consider one of these options:

  1. Invest in direct plans with advice from a SEBI-registered investment adviser.
  2. Invest through an online platform like at zero commission. Get a combination of robo advice and human advice.

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Can I convert my ELSS regular plan into a direct plan?

Investments in ELSS regular plans have a mandatory lock-in period of 3 years. You cannot redeem or switch your ELSS investment before 3 years. This also applies to investments in ELSS funds through systematic investment plans (SIPs). You can only withdraw each installment after three years of lock-in.

Therefore if you are looking to switch ELSS units that have been accumulated in a systematic manner you have to make a switch calendar.

Also note that when you switch from the regular plan to the direct plan, you sell units in the former and buy units in the latter.

After 3 years, you can switch to the direct plan of the same scheme or to any other scheme of the same fund house. You can also redeem your units and invest elsewhere or spend the money. Another option is to leave the money in the existing ELSS regular plan until you need it.

An exit load will not apply after three years. However, consider the tax implications before switching or redeeming your investment. You will have to pay Long-term Capital Gains (LTCG) Tax if the capital gain exceeds ₹ 1.0 lakh in a financial year.

You can switch from the regular plan of a mutual fund to the direct plan in the following ways:

  1. Online through the platform of your mutual fund AMC.
  2. Online through the platforms of CAMS, Karvy, MF Utility & MyMoneySage,
  3. Offline by submitting a physical transaction form at the office of your mutual fund.

Also read: Regular Vs Direct MF

Tax implications of switching your ELSS units

Long-Term Capital Gains (LTCG) tax @ 10% plus cess @ 4% is applicable from April 1, 2018. LTCG applies to capital gains of more than Rs.1.0 lakh on equity mutual funds redeemed or switched after one year.

There is no LTCG tax on capital gains of up to Rs.1.0 lakh earned in one financial year. LTCG tax applies at a flat rate of 10% without the benefit of indexation.You can do LTCG tax computation easily on Mymoneysage platform. You can also calculate the applicable LTCG tax. This will help you to decide on whether switching to the direct plan makes sense.

Switching an ELSS regular plan to the direct plan is like making a fresh investment. You will be eligible for a tax deduction of up to Rs.1.5 lakhs under Section 80C in the current financial year. The investment will also be subject to a lock-in period of 3 years.

If you switch to the direct plan of the same ELSS fund, you will be recycling your old tax saving investment. You will not be making a fresh investment to reach your goals. This will have a negative impact on long-term wealth creation.

If you leave the money in an ELSS regular plan, you will have to bear the burden of a higher expense ratio. However, you will still be earning decent returns. No LTCG tax will be applicable until you withdraw it. Consider the performance of the ELSS fund before you decide.

To conclude, you cannot switch from the regular plan of an ELSS mutual fund to the direct plan before three years. Consider the costs, benefits and tax implications before switching your ELSS investment.

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