Table of contents
Introduction
Direct Funds have become quite popular as they offer direct investments in mutual funds and save investors’ money from paying commissions to middlemen. This allows investors like you to save more funds and invest more. To learn more about how to invest in direct mutual funds, read this article.
What are direct mutual funds?
Direct mutual funds enable investors to purchase mutual funds directly from the Asset Management Company (AMC) or fund house. A fund house is also known as an Asset Management Company. It is an establishment that invests a pool of funds (which are called mutual funds) from various investors into a variety of financial instruments. These instruments can be Stocks, Bonds, Government Securities, and so on.
Direct mutual funds eliminate the need for an intermediary such as a distributor. This direct approach saves costs. Investors can bypass commissions and fees associated with traditional mutual fund investing.
For instance, someone wishes to purchase an apple. They may choose to visit their nearest supermarket for this purpose. In this scenario, the supermarket is an intermediary connecting the buyer with the farmer. If one were to bypass this intermediary or the middleman and buy apples directly from the farmer. They could save the commission or markup that would otherwise be paid to the supermarket.
Direct mutual funds work on a similar principle and help investors with ease of investment and savings.
Who is a distributor?
A Mutual Fund distributor is a person or an organisation that facilitates the mutual fund transaction between the investor and the AMC. The commissions paid out by AMC are the income for the distributor. They are paid by taking a small percentage of the invested value.
For instance, when investing ₹1000 in a fund through a distributor. The AMC deducts ₹10 from the investment capital and transfers it to the distributor. They reduce the initial investment to ₹990.
On the other hand, opting to purchase a mutual fund through the direct mode eliminates distributor involvement and commission payments. It results in an initial investment of ₹1000 and higher returns compared to the regular fund counterpart.
Features of direct funds
The following are the salient features of direct funds:
Independence from third parties
Direct funds empower investors by allowing them to make investment decisions. They do not depend on intermediaries such as distributors or agents. Direct funds enable investors to interact directly with the fund house or Asset Management Company (AMC). This direct interaction enhances transparency. It eliminates potential conflicts of interest that may arise when dealing through intermediaries.
Versatile investment options
One of the key features of direct funds is the flexibility they offer in terms of investment channels. Investors have the option to invest in direct funds through both online and offline channels. This flexibility caters to the diverse preferences and convenience of investors. It allows them to choose the mode of investment that best suits their needs.
No big transaction charges
In addition to avoiding distributor fees, investors in direct funds benefit from the absence of transaction charges. Unlike regular mutual funds, where investors may incur transaction fees for buying or selling units, direct funds do not levy such charges. Investors can optimise their investment returns by avoiding unnecessary transaction costs.
How to identify the best direct mutual funds?
The best direct mutual fund would have the following characteristics:
- Good returns over a long period.
- Is often not affected much by the market fluctuations.
- The expense ratio is lower when compared to peer funds.
- Offers diversification of the portfolio.
- The fund manager has an excellent track record.
Differences between a regular plan and direct plan in mutual funds
The asset allocation and fund manager(s) would be the same for regular and direct mutual funds offered by a fund house. The only way these funds differ is by the commissions or brokerages.
Direct vs regular mutual fund
| Parameter | Direct Funds | Regular Funds |
| Third-Party | Not present | Present |
| Expense ratio | Lower | Higher |
| Returns | Higher | Lower |
| NAV | Higher | Lower |
Advantages of direct mutual funds:
Low expense ratio:
Direct funds offer a lower expense ratio compared to regular mutual funds. This is due to the absence of distributor fees. Investors benefit from reduced costs. It allows more of their investment capital to contribute to fund growth. Lower expense ratios translate to higher potential returns over the long term.
Higher NAV
Direct funds typically have a higher NAV compared to regular funds. It reflects their lower expense ratios. A higher NAV indicates greater asset value per unit. It provides investors with a more accurate representation of their investment’s worth. Higher NAVs can lead to increased wealth accumulation over time. Investors benefit from the compounding effect of growth on a larger asset base.
No conflict of interest
Direct funds eliminate the conflict of interest that may arise when dealing with intermediaries such as distributors or agents. Investors can make investment decisions based solely on their financial objectives and risk tolerance. By bypassing intermediaries, investors can ensure that their interests align directly with the performance and objectives of the fund. It promotes greater transparency and trust in the investment process.
Read: What is a sectoral mutual fund?
Conclusion
Direct mutual funds offer investors a cost-effective and efficient way to invest in mutual funds. Knowing how to invest in direct mutual funds can help you bypass the involvement of intermediaries. Investors can enjoy lower expense ratios, higher returns, and greater control over their investments. You should also understand the advantages & disadvantages of direct mutual funds to make an informed decision. To know more, subscribe to StockGro.
FAQs
Direct mutual funds are investment options where investors can directly purchase mutual fund units from the Asset Management Company (AMC) without involving intermediaries such as distributors. Unlike regular mutual funds, which involve commission payments to intermediaries, direct mutual funds offer lower expense ratios and higher potential returns due to the absence of distributor fees.
Investors can start investing in direct mutual funds without the need for intermediaries. They can directly approach the respective Asset Management Companies (AMCs) either through their online platforms or by visiting their offices offline.
Yes, investors have the option to switch their investments from regular mutual funds to direct mutual funds. However, it’s crucial to assess any exit loads or tax implications associated with such switches.
Yes, Direct mutual funds are generally considered safe investment options. Like all mutual funds, direct funds are regulated by the Securities and Exchange Board of India (SEBI) to ensure investor protection.
he suitability of direct or regular mutual funds depends on individual investor preferences, financial goals, and risk tolerance. Direct mutual funds offer lower expense ratios and potentially higher returns due to the absence of distributor fees.