What are Direct Mutual Funds?

In the domain of mutual fund investment, direct mutual funds may be potentially smart ways to invest as investors seek cost savings. However, there are some considerations about direct mutual funds that investors should be aware of and this article dives deep into the topic to aid investors in making informed and intelligent investment decisions. 

What is a direct mutual fund?

Mutual fund investment has become a preferred investment avenue for many investors in India as mutual funds are diverse enough to suit most investment requirements. Furthermore, with different ways and means available to invest in mutual funds, investment in these instruments is easy and convenient. One way to invest in a mutual fund is directly, without the involvement of a broker or any other intermediary. A mutual fund direct plan, as it is called, allows the investor to invest in a specific mutual fund directly with an Asset Management Company (AMC) or a fund house. The result of this is that no distribution charges are levied so direct schemes have lower expense ratios relative to other non-direct mutual funds. 

What is the best way to invest in direct mutual fund plans?

As an investor, you can invest in a direct mutual fund or a regular mutual fund. So, you have two options for how to invest in mutual funds. Typically, many investors choose the direct plan route as it facilitates the investment in a mutual fund without the involvement of any distributors or middlemen. Additionally, direct mutual fund plans have several advantages over regular mutual fund schemes, and these attract investors. 

Platforms for Investing in Direct Mutual Fund Plans

Direct mutual fund investment is possible via the different platforms mentioned below:

• The official websites of Asset Management Companies
• Investment advisory platforms that are registered by the Securities and Exchange Board of India (SEBI)
• Mutual fund registrars

Documents Required for Direct Mutual Fund Investing 

Mutual fund investment is easy to undertake, provided investors provide mutual fund companies with relevant documents to sign up for a plan. Here are the key documents investors require to start a mutual fund scheme - direct plan: 

• Aadhaar Number 
• Bank account details
• PAN Number
• KYC information

Investing in Direct Mutual Fund Plans 

Direct mutual fund investment may be done by any investor. As direct mutual fund investment does not involve an intermediary, like a brokerage, investors are required to manage all the processes of investment on their own. This includes the submission of the application, the KYC compliance procedure, the nomination, and portfolio consolidation. Direct mutual fund investment application process activities may be undertaken online or offline. Nonetheless, most investors find that online methods offer ease and convenience. If the online process is chosen, investors must visit the website of the concerned AMC or fund house offering the plan and follow a menu-driven step-wise application process. 

In case you select the offline or physical application process to subscribe to a direct mutual fund investment plan, you may visit the Asset Management Company’s office or you may subscribe through their registrars. 

It is important to note that the process to apply and register for a mutual fund direct plan involves similar steps/documentation whether you apply online or offline. The process for the application and registration of a direct plan mutual fund investment is outlined below: 

• Step 1

Select a direct plan mutual fund that you wish to invest in. If you wish to apply at the mutual fund’s physical premises, you can visit the office and fill out an application form there. Alternatively, if you wish to apply online, you must visit the website of the fund house or AMC that is offering you the direct plan. Hence, first, you must decide whether you wish to apply offline or online. 

• Step 2

Whether you apply for a mutual fund scheme offline or online, you will have to complete a KYC process by submitting or uploading relevant documents. This process can be done in a few simple steps and only has to be done once. The information may be accessed for different mutual fund scheme subscriptions later. 

• Step 3

In case you are filling out a physical application for a direct mutual fund scheme, you may do so at the mutual fund company’s office and submit the documentation necessary. If you are undertaking an online process, you have to visit the AMC’s website and create a user account.

• Step 4

Both offline and online applications will require you to select the type of direct plan you wish to invest in. First, you must pick the ‘Direct’ option and then proceed. Application forms will give you two options after this - Growth and Dividend. With a direct mutual fund, you can choose to have capital appreciation with the growth option or a regular income source from a Dividend-focused plan. You may consider your personal goals while choosing one of these mutual fund direct schemes. 

• Step 5

Once you fill in your offline application form and submit your supporting personal documents, they will go through a verification process. This will occur with an online application as well. You may have to verify your subscription by using an OTP that you will receive. Verification may take a few minutes or longer, depending on the mutual fund company. 

• Step 6

Following the verification of information, you must buy your mutual fund units through any payment methods requested by the mutual fund company, either online or offline. 

Features of Direct Funds

Now that you have answered the question, “What is a direct mutual fund?” and gained awareness of specific aspects of such a mutual fund, you may wish to know the key features of direct funds. These are mentioned below: 

• Investors are permitted to invest in direct mutual funds online and offline.
• Direct mutual funds may be invested directly with the mutual fund house or the AMC without any involvement of an intermediary such as a broker. 
• No transaction fee is levied for subscription to a direct fund.
• There is no payment of commission made to the AMC and the expense ratio of such funds remains on the lower side. 
• Direct funds can potentially offer higher returns relative to regular schemes as they have low expense ratios and no commissions. 
• Investors have the facility of selecting a range of direct mutual fund schemes spanning different asset classes, consisting of debt, equity, thematic, and hybrid funds. This permits investors to create a customised yet diversified investment portfolio which may be lucrative in the long run. 

Advantages of Investing in Direct Funds

After reading about the features of direct mutual funds, you may have gauged some of the advantages that these funds offer investors. Here are the main advantages of direct plans in mutual fund investment: 

1. Low Charges and High Returns: Expense ratios are lower in direct funds relative to regular mutual funds. This is because payments of commissions, or distributions, to intermediaries do not have to be paid. Hence, these expenses do not eat into your returns, making your gains more profitable.
2. Tailor-made Investment: With direct mutual fund investment, you get more transparency concerning fund performance and costs. Investors readily get to access their fund information and this helps to make future investment plans. 
3. Fewer Conflicts of Interest: In a direct mutual fund, there are no middlemen involved, so conflicts of interest are lessened. There is only a professional fund manager to make decisions based on an investor’s goals and the fund manager’s expertise. This makes the management of funds easy. 

Conclusion

A direct mutual fund scheme can offer a plethora of investment advantages, the main one being cost savings in terms of no expense ratios and commissions. Another key advantage of these funds is that they can be customised to match an investor’s unique goals. Nonetheless, before you turn to the ever-popular direct mutual fund plans, make sure you assess your risk profile and financial requirements.