Direct Mutual Fund Investment: What You Need To Know

Direct investment in a mutual fund is when you invest in a mutual fund scheme without an intermediary, such as a broker or agent. In other words, you directly purchase the fund units from the official website of the Asset Management Company (AMC) or by visiting their branch office. The alternative to direct investment is a regular scheme, where you purchase mutual funds through a distributor or agent. Both direct and regular plans are part of the same mutual fund scheme, but direct plans have a lower expense ratio as there is no distributor involved, and therefore no commission to pay. Direct plans are suited to those who understand what kind of mutual funds they need and are capable of researching and selecting funds to invest in without the help of an intermediary.

Characteristics of Direct Investment in Mutual Funds

Direct vs Regular Plans

As per the Securities and Exchange Board of India (SEBI), mutual funds offered by an asset management company (AMC) come in two variants: direct funds and regular funds.

Direct funds are mutual fund schemes that are directly offered by the fund house or AMC without the involvement of a third party, distributor, or agent. The investors directly deal with the AMC offering the fund and there are no commissions or brokerage charges. The expense ratio of direct plans is lower than that of regular funds. Direct funds can be invested in both online and offline.

Regular funds, on the other hand, are mutual fund schemes that are sold through agents and distributors. Since investors don’t deal directly with the fund house, there are commissions or brokerage charges involved. Investors don’t pay the commission directly to the agent; instead, the fund house collects it through the expense ratio and pays the agent or distributor. Therefore, the expense ratio of regular funds is slightly higher than that of direct funds.

The asset allocation and fund manager(s) are the same for regular and direct mutual funds offered by a fund house. The only difference is in the commissions or brokerages.

The benefits of investing in direct funds include a lower expense ratio, higher Net Asset Value (NAV), and higher returns over the long term. There is also no conflict of interest as investors deal directly with the fund house, alleviating the risk of being misled by a third party.

However, investing in mutual funds requires a lot of time and effort to understand the different kinds of schemes and match them with financial goals. This is why many individuals still choose to invest in regular schemes, relying on the expertise of a mutual fund agent or distributor.

The selection between direct and regular schemes depends on the investor's experience and knowledge. If an investor has some experience and believes they can make the right investment decisions themselves, they can opt for the direct option. If an investor is unsure about their investment objective or finds it difficult to understand the different types of schemes, a regular plan is a better option.

Online vs Offline Investment

Direct mutual funds are schemes that are directly offered by the fund house or Asset Management Company (AMC) without the involvement of a third party, distributor, or agent. The investors directly deal with the AMC offering the fund.

Now, when it comes to investing in direct mutual funds, you have two options: online or offline. Here's a detailed comparison of these two modes of investment:

Online Investment

Online investment in direct mutual funds offers several advantages. Firstly, it is more convenient and less time-consuming than offline investment. You can invest from the comfort of your home without having to physically visit any offices. The online mode also provides access to a wider range of mutual fund schemes compared to offline investment. Additionally, once you have completed your Know Your Customer (KYC) formalities and updated your KYC details, you can use them to invest in multiple direct mutual fund schemes across different platforms. Moreover, when you register with an AMC online, you won't need to repeat the process for future investments in any MF scheme from the same company.

To invest in direct mutual funds online, you can follow these steps:

• Choose a Mutual Fund Scheme: Select the mutual fund scheme that aligns with your financial goals and investment objectives.
• Visit the Official Website: Go to the official website of the chosen Mutual Fund Scheme or the AMC.
• Open an Account: Set up an account with the Mutual Fund House or AMC by providing the necessary details.
• Select "Direct" Option: Under the "Plan Type" section, choose the "Direct" option to invest directly without involving any intermediaries.
• Choose the Investment Details: Specify whether you want to invest through a Systematic Investment Plan (SIP) or make lump-sum deposits.
• Provide Bank Details: Enter your bank details, including the name, account number, IFSC, and account type.
• Verify the Details: Review and verify the information you have provided to avoid any issues later.
• Complete the Transaction: Make the necessary payment, and you will receive a confirmation on your registered email or mobile number.

Offline Investment

Offline investment in direct mutual funds involves a more traditional approach. If you are uncomfortable with online transactions or prefer in-person interactions, the offline method might be preferable. Here are the steps for offline investment:

• Visit the Nearest Branch: Go to the nearest office of the Asset Management Company (AMC) whose fund you have selected.
• Complete KYC Process: If you haven't already, complete the KYC (Know Your Customer) process. You can obtain the KYC document at the AMC branch.
• Provide Documents: Carry and submit the necessary documents, including a self-attested copy of your PAN card and address proof.
• Fill and Submit Forms: Fill out the common application form or SIP form, and submit it along with a cheque or demand draft made in favour of the AMC for the desired investment amount.
• Receive Folio Number: Once the transaction is initiated, you will be allotted a folio number for your investments and provided with an account statement.

Choosing the Right Option

The choice between online and offline investment depends on your personal preferences, comfort with technology, and level of knowledge about investing in mutual funds. If you are computer-savvy and have a good understanding of mutual fund investments, online investment might be more suitable. On the other hand, if you prefer a more hands-on approach or have reservations about investing online, offline investment through a mutual fund advisor might be a better option. It is recommended to opt for a fee-based advisor if you choose this route.

Direct Plan Benefits

Direct plans are a type of mutual fund investment where investors deal directly with the asset management company (AMC) offering the fund. This means there is no third party, distributor, or agent involved in the transaction. Here are some key benefits of investing in direct plans:

No Intermediary Fees:

By eliminating intermediaries, direct plans offer lower expense ratios compared to regular funds. In regular funds, investors pay commissions or brokerage charges, which are usually included in the expense ratio. Direct plans, on the other hand, do not incur these additional costs, resulting in lower fees for investors.

Higher Net Asset Value (NAV):

The Net Asset Value (NAV) of direct plans is typically higher than that of regular plans. This is because, in regular plans, a portion of the returns is used to pay commissions to intermediaries. By investing in direct plans, investors get to keep a larger share of the returns, increasing their overall wealth over time.

Flexibility and Control:

Direct plans offer investors more flexibility and control over their investments. They can purchase fund units directly from the fund house, either online through the AMC's website or offline by visiting their branch office. This direct approach empowers investors to make their own investment decisions without relying on intermediaries.

Potential for Higher Returns:

The lower expense ratios and higher NAVs of direct plans translate into higher potential returns over the long term. While the difference in returns between direct and regular plans may seem negligible in the short run, it can become significant for long-term investors. Compounding effects further enhance the advantage of direct plans over time.

No Conflict of Interest:

Direct plans eliminate the risk of investors being misled by intermediaries who may have their own interests in mind. By dealing directly with the AMC, investors can make investment decisions based on their own financial goals and preferences, without the influence of agents or distributors.

Online and Offline Investment Options:

Direct plans offer investors the convenience of investing both online and offline. Online investments can be made through the AMC's website or other digital channels, while offline investments can be made by visiting the branch office of the AMC. This flexibility caters to investors' varying preferences and levels of comfort with digital platforms.

Regular Plan Benefits

Regular plans are a good option for those who are new to investing or are unsure about their investment objectives. These plans are also ideal if you find it challenging to understand the different types of mutual fund schemes and need guidance in selecting the right one. Regular plans are mutual fund schemes sold through agents and distributors. Here are some key benefits of regular plans:

Professional Guidance

One of the main advantages of regular plans is the access to professional guidance and expertise. Investing in mutual funds can be complex, and it takes time to understand the various schemes and match them with your financial goals. Regular plans allow you to leverage the knowledge and experience of mutual fund agents, distributors, or brokers. These professionals can help you navigate the different options, explain the terminologies, and ensure that your investments align with your investment profile. This guidance can be especially valuable for new or inexperienced investors.

Convenience and Simplicity

Regular plans offer a more convenient and simplified approach to investing. By working with intermediaries, you can rely on their expertise to make informed investment decisions without having to conduct extensive research on your own. Intermediaries handle the paperwork, application forms, and other administrative tasks associated with investing in mutual funds. This saves you time and effort, making the overall investment process more accessible and less daunting.

Peace of Mind

With regular plans, you can have peace of mind knowing that your investments are being managed by professionals. Mutual fund agents and distributors are registered and experienced individuals who are well-versed in the market. They can monitor your investments, provide ongoing advice, and help you stay on track to meet your financial goals. This can be particularly reassuring during market fluctuations or economic uncertainties.

Suitability for Short-Term Investments

While direct plans typically offer higher returns over the long term due to their lower expense ratios, regular plans can still be competitive for short-term investments. The difference in returns between regular and direct plans may not be significant over a short period. If you are considering short-term investments, regular plans provide a convenient and accessible option without sacrificing potential returns.

Ease of Transition to Direct Plans

If you start with a regular plan and later decide to transition to a direct plan, you have the flexibility to make that change. While switching from regular to direct plans may incur certain expenses, such as exit load and taxation implications, it is possible to convert your investments. This flexibility allows you to adapt your investment strategy as your knowledge and comfort level with mutual funds grow.

Direct Plan Suitability

Direct plans are for those who prefer to invest directly in a mutual fund without the help of a distributor or agent. This is similar to buying a product directly from the manufacturer, resulting in a lower cost to the customer. However, investing in a mutual fund scheme directly is not as simple as buying an item from a factory outlet, as it requires sufficient knowledge and awareness of the product, especially the risks associated with the potential rewards.

Direct plans are suitable for those who understand what kind of mutual funds are needed for different investment needs and are capable of researching these independently. This means making your own decisions about fund selection and execution, which not everyone may be capable of.

Direct plans are also a good fit for those who are willing to seek the professional advice of a registered investment advisor for a fee. This type of plan makes sense for knowledgeable, do-it-yourself (DIY) investors but may not be suitable for all, especially new and inexperienced investors.

If you are a new and inexperienced investor or unsure about which scheme to invest in, you may benefit from the guidance of a mutual fund distributor and opt for a regular plan.

• Knowledge and Experience: Direct plans are suitable for investors with sufficient knowledge and experience to select the right funds and manage their portfolio independently. If you are comfortable creating a financial plan, choosing funds that align with your goals, and regularly monitoring and rebalancing your portfolio, a direct plan may be a good option.
• Independence: Direct plans offer the advantage of independence from intermediaries. You deal directly with the asset management company (AMC) offering the fund, eliminating the need for distributors or agents. This direct approach can alleviate the risk of being misled by a third party and ensures that you are in full control of your investment decisions.
• Cost Savings: Direct plans have lower expense ratios compared to regular plans because there are no distributor fees or commissions involved. This can result in higher returns over the long term, making it a cost-effective option for investors.
• Online and Offline Investment Options: Direct plans offer the convenience of investing both online and offline. You can invest online through the fund's website, its RTA's site, or a fintech platform. If you prefer offline investments, you can visit the nearest branch of the fund house to initiate your investment.
• Suitability for Long-Term Investments: The benefits of direct plans, such as lower expense ratios, can compound over the years, resulting in higher returns on your investments over time. Therefore, direct plans are particularly advantageous for long-term investment strategies.
• Ability to Handle Market Volatility: Direct plans may be suitable if you can handle market volatility. Since direct plans are often not significantly affected by market fluctuations, they can provide more stable returns, especially for long-term investments.
• Understanding of Investment Profile: Investing in direct plans requires a clear understanding of your investment profile, including your financial goals, risk tolerance, and investment horizon. If you are knowledgeable about these aspects and can make informed investment decisions, direct plans can provide you with greater flexibility and control.

In summary, direct plans are suitable for investors who are knowledgeable and experienced in selecting and managing mutual funds, prefer independence in their investment decisions, and are seeking cost savings through lower expense ratios. However, if you are a new investor or prefer guidance, regular plans with the assistance of a distributor or agent may be a better option.

Frequently asked questions