Direct mutual funds are a type of mutual fund where investors can buy and sell mutual fund units directly from the mutual fund company. Mutual funds are a popular investment option for investors looking to grow their wealth over time. A mutual fund is a type of investment vehicle that pools money from different investors to invest in a portfolio of assets such as stocks, bonds, and other securities. Investors in mutual funds own a share of the portfolio’s assets, and the value of these shares rises and falls depending on the performance of the underlying assets.
Traditionally, mutual funds were offered in two types – regular mutual funds and direct mutual funds. In regular mutual funds, investors buy mutual fund units through a distributor or a broker. The distributor/broker earns a commission on the investment, which is paid by the mutual fund company. On the other hand, in direct mutual funds, investors can directly buy mutual fund units from the mutual fund company, bypassing the need for a distributor or a broker. In this article, we will focus on direct mutual funds and explore their features, benefits, and how to invest in them.
What Are Direct Mutual Funds?
As mentioned earlier, direct mutual funds eliminate the need for intermediaries like distributors or brokers. As a result, investors save on the commission or fees charged by intermediaries, which ultimately translates into higher returns.
Direct mutual funds are similar to regular mutual funds in terms of their portfolio composition, investment objective, and performance. Both types of mutual funds invest in a portfolio of assets and aim to generate returns for investors. However, the key difference lies in the cost structure and the mode of investment.
Benefits of Investing in Direct Mutual Funds
- Lower Expense Ratio
The expense ratio is the annual fee charged by mutual fund companies to manage and maintain the fund. This fee includes various costs like fund management fees, administrative expenses, marketing expenses, etc. The expense ratio is a crucial factor that affects the returns generated by a mutual fund investment.
In the case of regular mutual funds, investors have to pay an additional commission or fee to the distributor/broker, which ultimately increases the expense ratio of the fund. On the other hand, in direct mutual funds, investors bypass the need for intermediaries and can invest directly in the fund, leading to a lower expense ratio. As a result, direct mutual funds generate higher returns for investors in the long run.
- Higher Returns
As mentioned earlier, direct mutual funds have a lower expense ratio, which leads to higher returns for investors. The difference in returns may seem insignificant in the short term but can make a substantial impact in the long run. For instance, let’s assume that an investor invests Rs. 10,00,000 in a mutual fund with an annual return of 12% and an expense ratio of 1%. After ten years, the investment would grow to Rs. 31,14,989. However, if the expense ratio is reduced to 0.5%, the investment would grow to Rs. 34,08,943, which is a difference of Rs. 2,93,954. This illustrates the importance of low expense ratios in generating higher returns.
- Ease of Investing
Direct mutual funds provide a hassle-free and convenient mode of investment. Investors can invest in direct mutual funds online through the mutual fund company’s website or mobile application. The entire process is paperless, and investors can complete the investment process in a matter of minutes. Moreover, direct mutual funds offer more transparency in terms of portfolio composition, investment objective, and performance, which helps investors make informed investment decisions.
- Flexibility
Direct mutual funds offer more flexibility in terms of investment options. Investors can choose from various investment options like lump sum investment or systematic investment plan (SIP). In a lump sum investment, investors invest a lump sum amount in the mutual fund in one go, while in an SIP, investors invest a fixed amount regularly at predetermined intervals, like monthly or quarterly. This provides investors with the flexibility to invest as per their financial goals, risk appetite, and investment horizon.
- Direct Control
Direct mutual funds give investors more control over their investments. Since investors invest directly in the mutual fund, they have more say in the investment decisions. They can track their investments, monitor the portfolio composition, and make changes to their investment strategy as per their financial goals and risk appetite.
How to Invest in Direct Mutual Funds?
Investing in direct mutual funds is a simple and straightforward process. Here are the steps to invest in direct mutual funds:
Step 1: KYC Registration
The first step to invest in direct mutual funds is to complete the KYC (Know Your Customer) registration process. KYC is a one-time process that involves providing your identity, address, and PAN details to the mutual fund company. You can complete the KYC registration process online or offline by submitting the necessary documents.
Step 2: Select the Mutual Fund
After completing the KYC registration process, the next step is to select the mutual fund you want to invest in. You can choose from a range of mutual funds based on the investment objective, risk profile, and performance.
Step 3: Register and Invest
Once you have selected the mutual fund, you can register and invest in the fund. You can do this through the mutual fund company’s website or mobile application. You will need to provide your PAN and bank account details, select the investment option (lump sum or SIP), and enter the investment amount.
Step 4: Payment
After completing the registration process, you need to make the payment for the investment. You can do this through net banking, UPI, or other payment methods accepted by the mutual fund company.
Step 5: Confirmation
After the payment is made, you will receive a confirmation of the investment through email or SMS. You can also track your investment through the mutual fund company’s website or mobile application.
Regular vs Direct Mutual Funds
When it comes to mutual fund investments, investors have the option to choose between regular mutual funds and direct mutual funds. Regular mutual funds are those that are sold through intermediaries like brokers or distributors, while direct mutual funds are those that are sold directly by the mutual fund company to investors.
Regular Mutual Funds
Regular mutual funds are the traditional way of investing in mutual funds, and they involve the role of intermediaries like brokers or distributors. These intermediaries help investors in selecting the mutual funds based on their investment goals, risk appetite, and investment horizon. They also assist investors in completing the investment process, tracking the investments, and providing regular updates on the performance of the mutual fund.
However, the intermediaries charge a fee or commission for their services, which is deducted from the investor’s returns. This fee is typically around 1-2% of the investment amount, which can significantly impact the investor’s returns over the long term.
Direct Mutual Funds
Direct mutual funds, on the other hand, are those that are sold directly by the mutual fund company to investors without the involvement of intermediaries. In this case, investors can directly invest in the mutual fund by visiting the mutual fund company’s website or mobile application. Since there is no involvement of intermediaries, the fees or commissions charged are significantly lower than regular mutual funds, typically around 0.5% or less.
Direct mutual funds offer several advantages over regular mutual funds, including lower expenses, higher returns, more control, and transparency. Since there are no intermediaries involved, investors have more control over their investments and can track the performance of the mutual fund more closely. Additionally, direct mutual funds offer higher returns than regular mutual funds over the long term, primarily due to lower expenses.
How to Invest in Regular Mutual Funds?
Investing in regular mutual funds involves the following steps:
Step 1: KYC Registration
The first step is to complete the KYC (Know Your Customer) registration process, which involves providing identity, address, and PAN details to the intermediary.
Step 2: Select the Mutual Fund
After completing the KYC registration process, investors need to select the mutual fund they want to invest in based on their investment goals, risk appetite, and investment horizon. The intermediary can assist in selecting the mutual fund.
Step 3: Complete the Investment Process
Once the mutual fund is selected, investors need to complete the investment process by filling out the application form and submitting it to the intermediary along with the investment amount.
Step 4: Payment
After completing the investment process, investors need to make the payment for the investment through net banking, UPI, or other payment methods accepted by the intermediary.
Step 5: Confirmation
After the payment is made, investors receive a confirmation of the investment through email or SMS.
How to Invest in Direct Mutual Funds?
Investing in direct mutual funds involves the following steps:
Step 1: KYC Registration
The first step is to complete the KYC (Know Your Customer) registration process, which involves providing identity, address, and PAN details to the mutual fund company.
Step 2: Select the Mutual Fund
After completing the KYC registration process, investors need to select the mutual fund they want to invest in based on their investment goals, risk appetite, and investment horizon.
Step 3: Register and Invest
Once the mutual fund is selected, investors can register and invest in the fund through the mutual fund company’s website or mobile application. They need to provide their PAN and bank account details, select the investment option (lump sum or SIP), and enter the investment amount.
Step 4: Payment
After completing the registration process, investors need to make the payment for the investment through net banking, UPI, or other payment methods accepted by the mutual fund company.
Step 5: Confirmation
After the payment is made, investors receive a confirmation of the investment through email or SMS.
Key Differences between Regular and Direct Mutual Funds
Expense Ratio: Expense ratio refers to the fees charged by the mutual fund company for managing the investments. In regular mutual funds, the expense ratio is higher as it includes the commission paid to the intermediary, while in direct mutual funds, the expense ratio is lower as there are no intermediaries involved.
Returns: Since the expense ratio is lower in direct mutual funds, they tend to offer higher returns than regular mutual funds over the long term.
Control and Transparency: Direct mutual funds offer more control and transparency to investors as they can directly monitor and track their investments without any intermediary involvement. In regular mutual funds, investors may have limited control and transparency over their investments.
Fees and Commissions: In regular mutual funds, intermediaries charge a fee or commission for their services, which can impact the investor’s returns. In direct mutual funds, there are no intermediary fees or commissions, and the fees charged by the mutual fund company are lower.
Which is Better: Regular or Direct Mutual Funds?
The choice between regular and direct mutual funds depends on the investor’s investment goals, risk appetite, and investment horizon. Regular mutual funds are suitable for investors who prefer personalized investment advice and guidance from intermediaries. They are also suitable for investors who do not have the knowledge or expertise to select the right mutual funds for their investment needs.
On the other hand, direct mutual funds are suitable for investors who have the knowledge and expertise to select the right mutual funds for their investment needs. They are also suitable for investors who prefer more control over their investments and want to minimize the fees and commissions charged.
Mutual funds have become one of the most popular investment options among investors in recent years. Regular mutual funds and direct mutual funds are two options available to investors. While regular mutual funds involve intermediaries and higher fees and commissions, direct mutual funds are sold directly by the mutual fund company to investors, resulting in lower fees and commissions.
Investors should consider their investment goals, risk appetite, and investment horizon before choosing between regular and direct mutual funds. They should also take into account factors like expense ratio, returns, control, and transparency before making their investment decision.
Ultimately, both regular and direct mutual funds have their advantages and disadvantages, and the choice depends on the investor’s individual needs and preferences.
How to buy direct mutual funds?
Buying direct mutual funds is a simple process that can be done online. Here are the steps to buy direct mutual funds:
Step 1: Choose the Mutual Fund Company
The first step is to choose the mutual fund company that offers direct mutual funds. Most mutual fund companies in India offer direct mutual funds, and you can choose the one that best fits your investment goals.
Step 2: Register and Create an Account
Once you have chosen the mutual fund company, you need to register and create an account with them. You can do this by visiting their website and following the registration process. You will need to provide your personal details, such as your name, address, phone number, and email ID.
Step 3: Complete KYC (Know Your Customer) Process
Before you can invest in mutual funds, you need to complete the KYC (Know Your Customer) process. This is a one-time process that involves verifying your identity and address. You can complete the KYC process by submitting your PAN card, Aadhaar card, and other required documents to the mutual fund company.
Step 4: Select the Mutual Fund and Invest
Once you have completed the KYC process, you can select the mutual fund you want to invest in. You can browse through the list of mutual funds available on the mutual fund company’s website and choose the one that best fits your investment goals. Once you have selected the mutual fund, you can invest in it by providing the required details, such as the amount you want to invest, the mode of payment, and the frequency of investment (one-time or SIP).
Step 5: Confirm and Pay
After providing the required details, you will be redirected to a payment gateway where you can make the payment. You can make the payment using your debit card, credit card, or net banking. Once the payment is made, you will receive a confirmation of the investment through email or SMS.
Conclusion
Buying direct mutual funds is a simple and hassle-free process that can be done online. You can choose the mutual fund company that offers direct mutual funds, register and create an account, complete the KYC process, select the mutual fund you want to invest in, and make the payment. It is important to consider your investment goals, risk appetite, and investment horizon before investing in mutual funds. You should also take into account factors like expense ratio, returns, control, and transparency before making your investment decision.