Direct mutual funds were introduced as separate from the regular funds by SEBI in the year 2013 and these plans have been gaining popularity ever since. When one invests in the regular mutual funds, the adviser who may be a bank or a broker or an adviser will get commissions from the fund investment as made by you. This gets reflected in the higher expense ratio of regular funds vis-à-vis the direct mutual fund investments where the expense ratio is lower as there are no commission pay outs and this gets reflected in better return performance of these direct mutual fund investments.
In simpler terms, if you invest in a direct mutual fund, you are investing directly in the AMC and this lowers the cost of your investment. By choosing to invest in a regular plan on the other hand, you can invest through an intermediary by availing their distribution services.
For investors who are well versed with the mutual fund space, have the necessary bandwidth to carry out important and exhaustive research and who are confident about their decision while deciding the mutual funds to invest in, direct plans suit just fine. If not, paying for the advice either in the form of commissions or fees to your adviser is advisable as an uninformed or random decision to invest in just any fund can have adverse repercussions. An investment gone wrong or not reviewed on periodic intervals would cost much more than the cost of advice one might have to bear.
So, how does one invest in direct mutual funds?
Well, one can invest in physical mode or online depending on what mode of investment suits oneself and one is comfortable with. There are two types of plans available – direct and regular.
Direct mutual funds would save you the expense cost of commissions whereas the regular plan would have you pay this cost, albeit over time as upfront commissions have been taken off all mutual funds now.
Say, you choose to invest in fund ABC, then you will have to select the fund ABC-Direct plan in place of ABC – Regular plan and that will be it. The direct plan means you are investing directly in the AMC with no external party involved.
A lot of times investors believe that if they invest online, their investments would be routed in the direct plans of mutual funds but this is not so. One has to be sure about the choice of platform and if it offers investment in direct plans of mutual funds or no. Not every online platform offers direct mutual funds for investment.
Likewise, even if one invests directly through the AMC online, the choice of plan has to be made between direct and regular and one must be careful while filling in the relevant details at all times.
Direct mutual funds will always have the name direct or dir (in short) mentioned in the plan name and that’s the easiest way to identify these funds.
Another way to be sure that you are investing in direct plans of mutual funds is to check the expense ratio which would always be lower for direct mutual fund plans vis-à-vis the regular plans.
When you have decided about the fund you want to invest in, the next step is to select the fund with a direct option alongside it and this is how simple it is when it comes to investing in direct mutual funds.
When we know these benefits of investing in direct funds, the next question that comes up is that should you invest offline or online?
So, investing in a direct mutual fund plan will have the same return benefits whether you do it online or offline, the former of course is a smarter, cost & time efficient mode where any action with respect to your fund investment is just a few clicks away.
Direct funds or Regular Funds?
It is a choice that an investor has to make based on what matters to them more and how confident they are about their investment decisions.
When you invest in a direct mutual fund, you save on the expense cost that is otherwise paid out to the intermediary through whom you would otherwise invest. Investing in a direct fund rules out using any resource of such an intermediary including their research, platform or any other guidance that you might otherwise may just want to seek.
The choice of which way to go rests with the investor and he / she would ideally make the choice depending on the cost benefit analysis of both the options.
While the direct plans fit in the DIY or do it yourself category for investors where they do not need any help on deciding the fund to invest in and thus would rule out the intermediary channel to get optimal returns from their investments, the regular mutual fund plans compensate the intermediary for the services they would be rendering to their clients and which their client weighs above the cost of the higher expense ratio they have to bear.
Once again, knowledge of financial markets & experience therein is quite important as one invests in direct plans of mutual funds and it is not just the one time decision of investing but the whole investment process starting from understanding one’s risk profile to the model portfolio one should invest in to regular review of the investments and corrective action whenever the need be that one needs to be competent in when investing in the direct mutual funds. It could be a double edged sword and incomplete knowledge of the subject matter could prove detrimental to one’s financial health.
People often ask
- Should I invest in direct or regular mutual funds?
- Can I buy direct mutual funds through a demat account?
- How do I switch from regular to direct mutual fund?
- What is the benefit of direct mutual funds?
- Why is the NAV of direct plan higher than regular plan?
If you have the necessary knowledge, expertise & resources to be able to choose the right funds and review their performance on a regular basis, direct mutual funds are the space you should be exploring. If not, better to handheld in your journey of mutual fund investments by an experienced and qualified professional
Investing through demat account is as good as investing through an intermediary and such investments in mutual funds are not in direct but regular plans where the mutual fund pays a commission to the intermediary for the services rendered.
By putting a request to the respective AMC wherein you have made the fund investment in, you can easily switch from regular to direct mutual fund. But remember that this switch will be treated like a normal redemption only and exit load, if any will apply to the switched fund value. Also, the tax implications will remain and if you make this switch from regular to direct fund within 1 year for equity funds and within 3 years for debt funds, the short term capital gain tax will also apply.
Lower charge structure that translates to higher NAV and better and more substantial growth of one’s investment over the long term are some of the important benefits of direct mutual funds.
Because of the lower associated expense ratio of the direct plans, the NAV of the direct plan is always higher than that of regular plan.