Fund houses are helping investors ‘go direct’. In the latest effort, Franklin Templeton Mutual Fund has said no exit load shall be charged in respect of switches made between plans/options from ‘Regular Plan’ to ‘Direct Plan’ within the same open-ended schemes with effect from May 9, 2019.
‘Direct plan’ of a mutual fund is cheaper than its ‘regular plan’ due to lower expense ratio in direct plan. In regular plans, the higher expenses gets paid as commission to distributors.
“No load will be charged on switches to Direct Plan,” Franklin MF has said.
At present, an exit load was payable whenever investors switch money in ‘regular plan’ to ‘direct plan’ or when they sell the units depending on the cut-off periods set for various schemes. The cut-off ranges from one year to three years and the exit load could be 1-3%.
When an exit load is charged for switching, it means your investment value goes down even though you are keeping your money in the same fund. Weird logic, right? Yes, and that is why we guess Franklin Templeton MF chose to set it right. Let us explain with an example. Assume you had made an investment of Rs 1 lakh in Franklin India Bluechip Fund under ‘regular plan’ six months ago. The fund investment has now become Rs 1.07 lakh thanks to 7% gain in the last six months. Now, you want to go direct i.e. invest in the ‘direct plan’ of the same scheme. Even though you would technically be keeping the money in the same fund, there was an exit load of 1% since you are switching between plans within one year of allotment. The 1% exit load meant you as an investor would be paid 1% less i.e Rs 1070. So, you get units worth Rs 1,05,930 in the ‘direct plan’ even though you are for all practical purposes staying in the same fund.
From May 9, you would not be charged an exit load for switching from ‘regular plan’ to ‘direct plan’ in any open-ended schemes of Franklin Templeton MF. So, in the above example, you would be getting your full value of units switched from ‘regular plan’ to ‘direct plan’.
Sale and repurchase
Regardless of whether you are switching from a regular plan to a direct plan, do remember that switching of funds means selling your current units and purchasing units under the new plan. So you will be liable to pay applicable taxes. In case of equity funds, there will be short term capital gains (STCG) tax for investments less than a year and long term capital gains (LTCG) tax thereafter. In the case of debt funds, it’s STCG till three years and LTCG kicks off after that that.
Franklin Templeton MF said the trustee/AMC reserves the right to modify/introduce a load at any time in future on a prospective basis, subject to the limits prescribed under the regulations.
While Franklin MF’s move is positive for investors, it has implications for the distributors who get a commission on regular schemes. If this will also prompt other mutual funds to follow suit, then direct plan ramp up is likely to get a big boost. How distributors will view this move is yet to be seen.
Also, investors of funds need to keep in mind that when they shift to direct plans, they may not get advice from distributors unless they have signed up for an advisory service.