Invest Smartly: Direct Mutual Funds Guide

Investing in direct mutual funds is a way to cut out the middleman and buy directly from the manufacturer. Direct plans are for investors who want to invest on their own without the help of a distributor, and they benefit from lower expense ratios compared to regular plans. There are two ways to invest in direct mutual funds: online and offline. Online platforms such as the fund house website, Registrar and Transfer Agent (RTA) sites, or generic platforms like Mutual Fund Utilities (MFU) can be used. However, one must be careful to select the Direct plan option when filling out the online form. Offline investing involves filling out a physical application form and submitting it to the nearest mutual fund branch or RTA office. It is important to note that direct plans may not be suitable for everyone, especially new and inexperienced investors, as they require adequate knowledge and capability to select good funds independently or with professional advice.

How to buy Direct Mutual Fund plans online

Investing in Direct Mutual Fund plans online is a convenient way to save on commissions. Here is a step-by-step guide on how to buy Direct Mutual Fund plans online:

Complete your KYC (Know Your Customer) formalities:

Before investing in Mutual Funds, you must complete your KYC process. This is a one-time process and can be done by submitting a KYC form and providing documents such as proof of identity and address. Your PAN card is crucial, as Mutual Fund Companies will check if your KYC details are linked to your PAN.

Choose the Mutual Fund and Investment Plan:

The first step is to select the Mutual Fund and investment plan that aligns with your financial goals and risk appetite. You can choose between a Systematic Investment Plan (SIP) or lump sum deposits. Research the different types of Mutual Funds, such as equity funds, debt funds, or hybrid funds, and decide which best suits your investment strategy.

Decide on the Investment Amount:

Determine the amount you want to invest in the Mutual Fund scheme. This decision should be based on your financial goals and investment horizon. You can choose to invest a lump sum or set up a SIP, which involves investing a fixed amount at regular intervals.

Choose the Investment Platform:

You can invest in Direct Mutual Funds through various online platforms. These include the website of the Asset Management Company (AMC) or Mutual Fund House, Registrar and Transfer Agent (R&TA), or online platforms by SEBI-Registered Investment Advisers. Each platform may have a slightly different process, but the basic steps remain the same.

Register and Open an Account:

To invest online, you will need to register and open an account with the chosen platform. Provide the necessary details, such as your name, contact information, and bank account information. Ensure that your PAN and KYC details are linked to your account.

Select the "Direct" Option:

When investing online, make sure to select the "Direct" option. This is crucial to ensure you are investing in the Direct Mutual Fund plan without involving any distributors or agents. The "Direct" option might be available as a checkbox or a selection during the investment process.

Provide Investment Details:

Specify the investment details, such as the Systematic Investment Plan (SIP) or lump sum amount, and whether you are using the services of a Registered Investment Adviser (RIA). You may also need to provide your bank account details, including the name, account number, IFSC, and account type.

Review and Confirm the Investment:

Before finalizing your investment, carefully review all the details you have provided. Check that the Mutual Fund, investment plan, and amount are correct. Ensure your bank account information is accurate to avoid any issues with transactions.

Complete the Payment:

Proceed to make the payment using your preferred method. This could be through net banking, credit or debit card, or other available options provided by the platform. Once the payment is successful, you will usually receive a confirmation via email or SMS.

Monitor your Investment:

After investing in a Direct Mutual Fund, it is important to periodically review your investment's performance. You can track your investment by logging into your account on the platform you used to invest. Additionally, you can create a portfolio on financial websites or use a mobile application to monitor your investments across different Mutual Funds.

Remember to consider your financial goals, risk tolerance, and investment horizon when choosing and investing in Direct Mutual Funds. Conduct thorough research about the Mutual Funds and seek professional advice if needed.

Direct Mutual Fund plans vs Regular Mutual Fund plans

Direct Mutual Fund plans and Regular Mutual Fund plans are two distinct types of investment schemes offered by fund houses or asset management companies (AMCs). Both options have their advantages, and investors should understand how these plans work in terms of cost structure and returns before making an informed decision about which to invest in.

Regular Mutual Fund plans involve investing through an intermediary such as a financial advisor, broker, or banker, who advises on and facilitates the transaction. These intermediaries offer services like investment advice, portfolio evaluation, and transaction assistance. The fund house pays them a commission or distribution fee, which is then passed on to the investor, impacting their overall returns. Regular plans are suitable for investors who need continuous support and guidance from a financial advisor. The advisor assists in deciding where and how much to invest based on the investor's objectives, risk appetite, and risk profile. Regular plans also offer services such as record-keeping, documentation, and providing tax proofs.

On the other hand, Direct Mutual Fund plans allow investors to deal directly with the AMC without any intermediaries. Investors can purchase these funds online through the AMC's website or by visiting their office. Direct plans have a lower expense ratio since there are no broker or commission fees involved. This results in higher returns for the investor. Direct plans are suitable for investors who are knowledgeable about the market, comfortable with independent decision-making, and seeking cost efficiency and higher returns. However, investors opting for direct plans need to devote time to monitoring the performance of their investments and conducting market research.

The key differences between Direct and Regular Mutual Fund plans can be summarised as follows:

• Net Asset Value (NAV): Direct plans have a higher NAV compared to regular plans due to their lower expense ratio.
• Returns: Direct plans offer higher returns due to their lower expense ratio, as the exclusion of distributor commissions leads to higher gains for the investor.
• Role of Financial Advisor: Regular plans include the assistance of a financial advisor, while direct plans are for investors who prefer to make their own investment decisions without advisory services.

How to switch from Regular Mutual Fund plans to Direct Mutual Fund plans

Before the advent of direct mutual fund plans in 2013, most investors channelled their investments through distributors, advisors, or other third-party avenues. This typically meant that they were investing in the ‘regular’ plan of a specific mutual fund. These regular mutual funds often came with a higher expense ratio, which, in turn, had a negative impact on the returns on investment.

Direct plans, on the other hand, are sold either directly through the mutual fund company or online platforms like Groww, which provide a gateway to connect you directly to the AMC. Direct plans have zero commissions and fees, making them more cost-effective than regular plans.

Online Method:

• Log in to your mutual fund account through the AMC's portal or via agencies like CAMS or KARVY.
• Navigate to the transaction page to buy, change, or redeem fund units.
• Opt for the 'switch' option and select the desired fund for transactions.
• Click on the 'Direct Plan' option and follow the displayed instructions.

Offline Method:

• Visit the nearest branch of the mutual fund house in whose scheme you have invested.
• Ask for a 'Switch' form. If unavailable, request a redemption form.
• Fill in the required details, sign, and submit the form.
• You will receive confirmation from the fund house once the switch is processed.

It is important to note that switching from a regular to a direct plan may be treated as a redemption of the old scheme and a fresh purchase of the new scheme for tax and exit load purposes. Therefore, there may be tax implications and exit loads applicable to the switch.

• Cost Differential: Direct plans have a lower expense ratio, resulting in higher returns over time.
• DIY Approach: Direct plans require you to manage your investments independently, so be prepared to make your own decisions.
• Research and Knowledge: Direct plans demand more investment knowledge, so ensure you are comfortable with researching and understanding the market and investment strategies.
• Tax Implications: Consult a tax expert to understand the tax consequences of switching, especially if you've held the investments for a significant period.
• Ease of Investment: Choose a user-friendly platform that provides the necessary tools for tracking and managing your investments.
• Transaction Costs: Be mindful of any additional transaction costs associated with buying and selling in direct plans, as they can vary between fund houses and platforms.
• Regular Review: Commit to periodically reviewing your direct plan investments to make informed decisions based on market conditions and performance.

Pros and cons of investing in Direct Mutual Fund plans

Pros of investing in Direct Mutual Fund plans:

Direct mutual funds are those in which investors buy fund units directly from the Asset Management Company (AMC) without involving any intermediaries such as distributors or brokers. Some pros of investing in Direct Mutual Fund plans are:

• Direct plans have a lower expense ratio than regular plans. The expense ratio of HDFC Balanced Fund – Regular Plan is 2.07% (as of March 2015). Whereas, the expense ratio of HDFC Balanced Fund – Direct Plan is 1.20%.
• The Net Asset Values (NAVs) of Direct Plans will be higher than the Regular Plans. The NAV of HDFC Balanced Fund – Regular Plan is Rs 109.85 whereas the NAV of HDFC Balanced Fund – Direct Plan is Rs 111.97.
• The difference in returns generated by a Regular Plan and a Direct Plan of a scheme is expected to range between 0.5% and 1%. This difference will compound year on year. The last two years' CAGR (Compounded Annual Growth Rate) of HDFC Balanced Fund – Direct Fund (monthly SIP) is 22%. Whereas, HDFC Balanced Fund – Regular Plan has given a return of around 20.97% during the same period.
• Direct plans are for those who prefer to invest directly in a mutual fund scheme without the help of any distributor/agent. Investing in a Direct Plan is like buying a product from the manufacturer directly, whereby the cost to the customer would be lower.

Cons of investing in Direct Mutual Fund plans:

Some cons of investing in Direct Mutual Fund plans are:

• Choosing a Direct Plan means making your own decisions about fund/scheme selection (and the related execution work) which not everyone may be capable of.
• When the markets fall and investment values come under pressure, independent advice from a professional advisor can help one stay the course. Thus, a Direct Plan makes sense only if you have adequate knowledge and capability to select good funds yourself, or are willing to seek the professional advice of a registered investment advisor for a fee.
• While the Direct Plan makes sense for knowledgeable, Do-it-Yourself (DIY) investors, it may not be suited for all investors, especially new and inexperienced investors. So, if you are a new and inexperienced investor or unsure of which scheme to invest in and need guidance/assistance in investing, you may be better off seeking the help of a mutual fund distributor and investing in a Regular Plan.

Best platforms to invest in Direct Mutual Fund plans

Investing in direct mutual funds online offers several benefits to investors. Some of the key advantages include cost savings, higher returns, ease of online transactions, flexibility and control, and no intermediary bias.

Mutual Fund Utility (MFU)

Mutual Fund Utility (MFU) is a platform developed by the mutual fund industry, offering free transactions. It allows investors to access and manage their mutual fund investments across different fund houses using a single platform. MFU is ideal for investors who prefer a single username and password. While most fund houses are part of the MFU platform, some, such as Mirae Asset MF and LIC MF, are not. This may not be a significant drawback for most investors, as funds managing 96% of the industry's Assets Under Management (AUM) are available on MFU.

Fund House Websites

Visiting the official websites of the respective fund houses is another option for investing in direct mutual funds. This method offers the comfort of dealing directly with the fund house, and transactions on these portals are typically free of charge. However, investors will need to remember multiple username and password combinations if they have investments with various fund houses.

Online Direct Portals

There are several online direct portals that investors can use to purchase direct mutual funds. These include platforms like ORO Wealth, which uses the MFU platform, and Coin by Zerodha, which is linked to the StAR Mutual Fund platform developed by the Bombay Stock Exchange. Additionally, there are platforms like Clearfunds, which have direct tie-ups with fund houses, offering more control over transactions. It is important to note that these portals typically charge a transaction fee, which should be considered when calculating the total cost of the investment schemes.

Demat Account

While not mandatory, investors can also consider using a Demat account to invest in direct mutual funds. The advantage of holding mutual funds in a Demat account is the ability to build a consolidated portfolio of various investments, such as stocks, bonds, and gold ETFs. Additionally, a Demat account can make it easier to update personal details, as changes can be made through the depository participant without approaching multiple fund houses. However, investors should be aware that holding mutual funds in a Demat account may incur additional charges, such as annual Demat account maintenance fees.

Mobile Applications

Several mobile applications are available that facilitate direct mutual fund investments, each offering unique features and user experiences. Some popular apps in this space include Kuvera, Groww, Zerodha Coin, ET Money, Paytm Money, and ICICI Direct. When choosing an app, investors should consider factors such as user interface, features, fees, and alignment with their financial goals. It is advisable to stay updated with the latest reviews and features, as the landscape of financial apps can evolve rapidly.

Frequently asked questions