Direct Mutual Funds – Concept, Reasons to Invest, Facts, Investment Process & more
Know everything about Direct Mutual Funds here. Find details like its concept, why one should invest in this type of mutual fund, what are the benefits, how to invest, features & more.
Lets get Started & know in detail about Direct Mutual Funds.
About Direct Mutual Funds
All mutual funds are available in two plans – Regular and Direct Mutual Funds. An investor must know about each type of mutual fund before investing money in a mutual fund scheme.
Direct Mutual Fund Schemes were introduced by the Securities and Exchange Board of India (SEBI) in 2012 as an alternative to the regular mutual fund schemes.
As the name suggests, a Direct Mutual Funds scheme is the one where you can directly purchase from a fund house or an Asset Management Company (AMC).
A Direct Mutual Funds scheme does not include any distribution commission, whereas, in a regular scheme, investors have to pay a required amount of commission.
This is because a regular mutual fund scheme involves the engagement of a third-party, namely, an advisor, broker, or distributor.
They are known as financial intermediaries. Management of a mutual fund scheme involves various costs and expenses.
These expenses may include fund management fees, sales and distribution expenses, custodian’s fees, registrar’s payments, etc.
Both the mutual fund schemes are also under the control of the same mutual fund manager. They also invest in the same assets as well.
The involvement of a financial intermediary in a regular mutual fund scheme makes all the difference in various aspects like returns, expense ratio, Net Asset Value (NAV), etc.
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Why Invest in Direct Mutual Funds Scheme?
There are various reasons why an investor should opt for direct mutual plans instead of regular ones.
Here’s a list of various benefits an investor can avail of while investing through a Direct Mutual Funds scheme:
As compared to the regular mutual funds, direct funds are known to reap significantly more returns. This is also one of the main reasons for choosing Direct Mutual Fund Schemes over regular ones.
Since the investors don’t have to pay any brokerage or commission, they get to enjoy marginally higher returns.
When compared to the returns of regular mutual funds, the difference may not look consequential, but it will be massive when you invest with a long-term horizon.
Here’s an example where you can note the difference in the returns of direct and regular fund schemes for a period of one year.
|Fund||1 Year Returns (Direct)||1 Year Returns (Regular)|
|Motilal Oswal Multicap 35||16.98%||15.50%|
|Sundaram SMILE Fund||17.95%||17.05%|
|Aditya Birla SL Tax Relief 96||22.90%||21.27%|
Higher Net Asset Value
Net Asset Value represents the value and performance of a fund in the current market. Simply put, it is the market value of all the securities that a scheme holds.
Since the markets fluctuate regularly, the daily value of NAV also changes routinely.
Because an investor does have to pay extra brokerage fees, the Net Asset Value of Direct Mutual Fundss is relatively higher than that of the regular funds.
Besides, here’s an example showing the difference in Net Asset Values of direct and regular funds of a few mutual fund schemes:
|Fund||NAV (Direct)||NAV (Regular)|
|HDFC Small Cap Fund||Rs. 49.539||Rs. 46.954|
|Reliance Large Cap Fund||Rs. 33.7213||Rs. 32.1887|
|L&T Short-Term Income Fund||Rs. 19.026||Rs. 18.7264|
Lower Total Expense Ratio (TER)
The Total Expense Ratio measures the total costs and expenses associated with managing and operating a mutual fund scheme.
An AMC also charges extra fees from an investor who invests using regular fund schemes. These extra fees are also payable to the intermediaries like distributors, advisors, or brokers.
Since there is the involvement of a financial intermediary in a Direct Mutual Funds, the TER is much lower as compared to the regular fund scheme.
This helps an investor to save a ton of money while investing in securities.
No Conflict of Interests
Since you are completely in charge of your mutual fund investments, there can be no conflict of interests between you and your financial intermediary.
In a regular mutual fund, it is the advisor who receives a part of your bonus, and you’re hardly familiar with the final returns or even the AMC.
In case an agent changes an agency or moves to a different city, you’re left to deal with all the processes yourself.
Through a Direct Mutual Funds scheme, you can directly engage or consult with the AMC.
Besides, this helps to educate you with all the necessary procedural mechanisms and build a direct link with the principal.
It also alleviates you from the dependency a regular mutual fund creates.
Lower Chances of Being Misled
When you choose a regular mutual fund scheme, there are chances of an agent trying to lure you into a particular fund scheme for their benefits.
If you look at the reports of the consumer forum, you’ll also note that there has been an increase in the number of complaints against agents who duped investors and stole millions from them.
While not intermediaries are frauds, the mere dependence of their commission on your investment can increase the chances of them deceiving you.
Hence, in a Direct Mutual Funds scheme, no participation of a third-party significantly reduces the chances of you being misled.
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Facts & Features of Direct Mutual Funds
In a Direct Mutual Funds scheme, since there is no secondary advisor, you have to conduct all the market research by yourself.
You must have a proper understanding of the capital markets, knowledge about the analysis of the performance of a scheme in a market, and the skill of how, where, and when to allocate different resources.
If you do not understand the various risks involved in an investment or cannot keep track of the performance of your scheme, it is better to choose a regular mutual fund.
It is always better to pay a portion of your profits to an experienced individual rather than losing a load of your money because of miscalculated risks.
How to Invest in Direct Mutual Fund Schemes?
There are various ways through which you can invest in a Direct Mutual Funds. Some of these ways include:
Through an Asset Management Company (Fund House)
You can invest in mutual funds directly through an AMC or a fund house.
If you choose this way of investing, the fund house will require you to visit it for the first time to get your KYC (Know Your Customer) done.
The next investments may not require you to make visits, provided that the company you chose offers online investments in your particular scheme.
Through CAMS / Karvy
CAMS (Computer Age Management Services) is an Indian mutual fund transfer agency that has primarily three shareholders, NSE (National Stock Exchange) Ltd., HDFC Bank Group, and Acsys.
CAMS facilitates the use of a web portal and mobile applications through which investors can process transactions without the help of customer service.
Karvy is one of the largest Registrar and Transfer Agents that manages over 70 billion investor accounts. These intermediaries also assist people with their financial needs and charge a flat fee for their services.
Through Mutual Fund Utilities
Many fund houses offer the initiative of a Mutual Fund Utility. Here, investors can easily invest their money in various schemes of an AMC.
Then, they keep a track of their transactions and holdings in one place.
Through Robo Advisors
The current advancements in technology have introduced digital platforms that offer automated, algorithm-based financial advice.
These platforms also collect data from the clients and understand their financial conditions and objectives through an online survey.
Based on the client’s answers, they then offer a suitable investment plan.
Through Mutual Fund Distributors
You can also invest in Direct Mutual Fundss via Mutual Fund Distributors.
There are many distributors like Groww, ETMoney, Zerodha, PayTM Money & more, who offers Direct Mutual Fund Schemes via their platforms.
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Direct Mutual Funds – Conclusion
In case you have already invested in regular mutual funds, it is possible to switch. You can try switching to a Direct Mutual Funds scheme.
However, a fund house considers switching from a regular scheme to a direct one as redemption. Hence, switching requires you to pay your exit load as well as capital gains tax.
After knowing the advantages of Direct Mutual Fundss over the regular ones, it’s clear that investing in Direct Mutual Fund Schemes is more beneficial.
But, keep in mind that if you are new to the field of mutual investments and do not know about the risks involved, it is always wise to choose a regular fund scheme to help you with all calculations and risky decisions.
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