New Delhi, Aug. 19 -- Both direct and regular plans of a mutual fund have the same portfolio and are managed by the same fund manager. The key difference is the expense ratio.

Regular plans have higher expenses, which reduce their NAV compared with direct plans. Over time, the lower expense ratio of direct plans can translate into higher returns as the investment compounds.

This often prompts investors to switch from regular to direct plans. But there are hidden tax implications and other factors you must consider.

Says Mukesh Kumawat, Executive Director, Anand Rathi Wealth, "Switching from a regular plan to a direct plan of the same mutual fund is treated as redemption of the existing units and a fresh investment in the new plan."

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