image of direct mutual fund

Direct Mutual Fund – Everything You Need To Know

Direct mutual fund scheme was introduced by the Securities and Exchange Board of India (SEBI) in January 2013. Nowadays, the mutual fund is very popular investment tools that conjointly offer income tax deduction under Section 80C.

This is an ideal investment option for regular investors. So, anybody can start investing in a mutual fund scheme to realize their monetary goal.

There are two types of mutual fund available for you – Regular Mutual Fund and Direct Mutual Fund. In this article, we are going to discuss the direct mutual fund. So, you will know why you need to start investing in direct plan.

Let’s start.

What is a Direct Mutual Fund plan?

image of direct mutual fund

In a mutual fund, a fund manager collects money from investors and invests the money on their behalf. So, the fund manager of the corresponding Asset Management Companies (AMCs) charges a small fee for managing the money. In 2013, the SEBI made mandatory for all mutual fund houses or AMCs to provide the option of ‘Direct Plans’ for all investment schemes.

Therefore, direct mutual fund systems eliminate the ‘middle man’ conception. During this approach, the investor’s money directly routes to the mutual fund. So, no such commissions need to pay by the AMCs on the money you invest. Hence, the expense ratio for a direct mutual fund becomes less as compared to the regular mutual fund. So, you get higher returns from the direct fund.

Note: The expense ratio is the cost that investment companies charge to the investors to manage a mutual fund or exchange-traded fund (ETF). So, the expense ratio is the management fee and the operating costs of the fund.

Direct Mutual Fund v/s Regular Mutual Fund

  • The direct mutual fund plans are cheaper than the regular mutual fund plans because you can save the commission chargers to intermediaries (agent/ broker/fund managers).
  • There’s no guidance or advisory is available under the direct plan. So, you have to do your own research before investing. On other hands, investment support is available in regular plan from the investment advisor or fund managers.
  • Due to the distributional cost, expenses ratio is higher for the regular mutual fund that direct mutual fund. The return on investment we make on a direct plan is approximately 0.5% higher for equity funds and approximately 0.2% higher for debt funds.

Who should invest in Direct Mutual Funds?

image of Who should  invest Direct Mutual Funds

Anyone can invest in a direct mutual fund scheme. There is no such agent or broker involved with the investment. So, you have to take care of all processing activity on your own. It includes the submission of the application, nomination, and know your customer (KYC) issues.

Essential documents

  • Permanent Account Number (PAN)
  •  Aadhaar card/ passport/ voter card
  •  A bank account
  •  Submit KYC through the Aadhaar number

Why general investors hesitate to invest in direct plans?

image of Why investors hesitate to invest in direct plans
  1. The main reason is the lack of awareness and inadequate investment education. So, people do not feel confident to operate own investment. Therefore, they prefer to rend advice from an expert fund manager.
  2. There is no guidance of the agents in the direct mutual fund. So, you need to do own research. Above all, due to lack of time in the busy schedule, many general investors avoid direct funds.

Why invest in Direct Mutual Fund?

Due to the lower expense ratio, a direct plan produces better interests than a regular plan. So, higher expense ratio translates into a lower returns for the investors. Therefore, in the long time frame, the returns generated by direct plans are much higher. Have a look at the chart below.

Fund Category Regular Plan Direct Plan Difference
Equity: Large Cap 1.27% 0.94% 0.33%
Equity: Mid Cap 2.41% 1.34% 1.07%
Equity: Small Cap 2.45% 1.37% 1.08%
Equity: Multi Cap 2.39% 1.36% 1.03%
Hybrid: Aggressive Hybrid 2.37% 1.24% 1.13%
Hybrid: Dynamic Asset Allocation 2.38% 1.27% 1.11%
Hybrid: Equity Savings 2.17% 0.89% 1.28%

Source: Value Research, Data as on 26/09/2018

Read Also: Expense Ratio

Is a Demat account necessary to invest in Direct Mutual Fund?

No, you don’t need to open a demat account to invest in a direct mutual fund. As regular mutual funds are controlled through fund managers, and you need to pay a commission for their service, so, their demat account is required to invest.

Few brokers like Zerodha offers Direct Mutual Fund investment through its “Coin” platform.

How to invest in Direct Mutual Fund?

There are different ways to invest in direct mutual fund.

Using AMC’s Websites and Apps

image of direct invest through AMC Websites and Apps

Nowadays, almost all the leading AMCs in India have their website and mobile App. So, investing through the mutual fund become more comfortable and convenient due to their online presence.

Therefore, you can start investing in a mutual fund by creating an online account with an AMC. No intermediate person is there in between. You can set up SIP, purchase or redeem your units, switch from one fund to another basis of your terms independently.

Read also Top AMC (Asset Management Companies) in India

Registrar & Transfer Agent (R&TA) 

image of Investment through Registrar & Transfer Agent

Registrar & transfer agents have managed transactions of the Mutual Fund. Likewise, all kind of transaction has maintained by the skilled expertise of R&TA, like buying, exchanges, email handling, changes in personal information. So, they record investor’s details for the corresponding mutual fund houses on behalf of them.

So, in India of the Mutual Funds are served by the two famous R&TA. There are  Computer Age Management Services (CAMS) and Karvy. These two R&TA offer Mutual Fund investment service through AMCs portal and apps.

So, as an investor, you just need to remember your login credential. Also, you’ll be able to invest through these RTAs by in person visiting their offices.

Mutual Fund Utilities

Mutual Fund Utility (MFU) is a very innovative shared service provided by the Mutual Fund industry under the guidance of the Association of Mutual Funds in India (AMFI). So, this browser-based initiative acts as a transaction aggregation service where you can participate in multiple schemes using a single window.

So, you just need to create an account and you can make a transaction in mutual funds of almost all the AMCs. It will directly connect you to the transfer agents (RTA), banks, AMCs, payment gateways (PG) and KYC registration agencies (KRAs). Therefore, you will be enabled for all type of online transaction in multiple schemes through a single form/payment.

Robo-Advisory Websites and Apps

image of investment through robo-advisory service

Robo-advisors are the automated digital advisory system that provides algorithm-based financial planning services with no such human management. These types of financial advisory system are more affordable than other human advisers.

The first robo-advisor, Betterment was launched in the year 2008. Remember? This was the year of the great recession. Their initial purpose was to provide unbiased advice and help the investors to rebalance assets within the speculated time period.

So, a robo-advisor collects information about the financial situation and future goals of their clients. Then using these data, through an online survey, they offer advice to investors.

The main advantage of robo-advisers is zero human bias investment advice with very nominal cost. They also provide the 24×7-service window.

Many popular websites and apps have been launched in the last few years. Few famous robo advisors in India are Arthayantra5nenceInveztaScripbox etc.

Conversion of Regular to Direct Mutual Funds – possible?

Yes, a regular mutual fund investor can shift to a direct mutual fund. But it may cause tax implications in the form of short-term capital gains (STCG) and long-term capital gains (LTCG).

So, you can shift your investment plan directly from the AMC portal. It can also be done through MFU, Karvy, CAMS, and SEBI RIAs.

Here you need to provide your required investment details (scheme name, folio number and holder details) to them, and they will help you to transfer your investment to the direct plan.

Bottom Line:

Many of us consider investing in the mutual fund is a very complicated and time-consuming job. But, that’s not true. Nowadays, many ready to use tools available to compare the available schemes of the direct mutual fund.

This time you need to ask yourself – Are you compromising the long-term returns for a bit comfort at present and not availing services of the mutual fund?

Even if you are a naive investor, still you can invest in a direct mutual fund to meet your financial goals. In conclusion, you need to have a fair knowledge, and you can start investing in direct mutual fund.

But, if you have already started fund investment then keep observation the funds and rebalance the portfolio once required.  So, if you’ll try this often, you don’t need a fund manager or agent or any consultant any longer.

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