What is Direct Mutual Fund

Direct mutual funds are investment options that allow you to purchase units directly from the Asset Management Company (AMC), bypassing intermediaries such as brokers or distributors. By cutting out the middleman, these funds typically have lower expense ratios, which can lead to potentially higher returns for investors. In contrast, regular mutual funds involve investing through brokers or distributors, which often results in higher costs due to added commissions or fees.
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Direct Mutual Funds
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4 mins
27-March-2025

There are many different types of Mutual funds available to invest in, including something known as direct mutual funds. Direct funds are mutual fund schemes provided directly by the fund house or AMC, distinguished by the prefix 'direct' in their names. These funds eliminate the need for intermediaries like third-party distributors or agents, enabling investors to engage directly with the AMC offering the fund. Direct mutual funds offer lower costs, and a clearer path to reach your financial goals.

This article explains meaning of direct mutual funds, how it works, features, advantages and disadvantages, how to invest and more.

What are Direct Mutual Funds?

Direct mutual funds or direct funds are a unique type of mutual fund investment where investors directly purchase units from the fund house without involving any intermediaries like distributors or brokers. In simple terms, it is like buying directly from the source. These funds bear the prefix 'direct' in their names.

The primary distinction lies in the absence of a commission or distributor fee, making direct mutual funds cost-effective compared to regular mutual funds. Investors can access these funds through the fund house's website or online platforms, allowing for greater transparency and control over their investments. This direct approach potentially leads to lower expenses and, subsequently, the opportunity for higher returns. Direct mutual funds are an attractive option for investors seeking a more cost-efficient and self-managed investment journey.

Direct mutual funds let you invest without distributor commissions, helping you earn better returns. Compare Mutual Fund Options Now! and choose the best plan for your goals

How does a direct mutual fund work?

In a Direct Plan, investors must directly invest with the AMC, without the involvement of any distributor to facilitate the transaction. Conversely, in a Regular Plan, investors make their investments through an intermediary, such as a distributor, broker, or banker, who receives a distribution fee from the AMC, which is deducted from the plan.

Features of Direct Funds

Listed here are some key features of direct mutual funds:
  • Lower expense ratio: Direct mutual funds have a lower expense ratio compared to regular mutual funds, as there are no distribution commissions involved.
  • No commission for distributors: Since direct funds are not sold through intermediaries, there is no need to pay commissions to distributors, making them cost-effective for investors.
  • Online and offline investment options: You have the option to invest in direct funds through both online and offline channels. You can conveniently purchase direct mutual funds online through various investment platforms and R&TAs (Registrar & Transfer Agents), providing ease of access and streamlined investment processes.

Advantages of Direct Mutual Funds

Investing in Direct Funds comes with several key advantages:

  • Relatively low expense ratio: Direct Funds boast lower expense ratios compared to regular funds. This is because there is no intermediary between investors and fund firms. Regular funds involve commissions paid to agents, which are recouped through their expense ratio. Although the difference in expense ratio between Regular and Direct Funds may seem minimal initially, it can accumulate significantly over time.
  • Greater NAV: The Net Asset Value (NAV) of a Mutual Fund is crucial, determined by dividing the total value of assets in its portfolio by the number of outstanding units. Direct Funds tend to have a higher NAV than traditional funds due to the absence of brokerage fees for investors.
  • Higher returns: With a lower expense ratio and no brokerage or fees involved, Direct Funds often yield higher returns. While the disparity in returns between regular and direct funds may not be immediately apparent, it becomes more pronounced when considering a long-term investment horizon.
  • Cost efficiency: Direct mutual funds have lower expense ratios since they eliminate distributor commissions. This cost-saving allows investors to earn higher returns over time compared to regular funds. The reduced expenses help maximise investment growth, making them a preferred choice for cost-conscious investors looking for better capital appreciation.
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  • Control and flexibility: Investors in direct mutual funds have complete control over their investment decisions. They can select funds based on independent research without relying on intermediaries. This flexibility allows them to customise their portfolio as per their risk appetite, financial goals, and market conditions.
  • Long-term wealth creation: Since direct mutual funds have lower costs, the compounding effect on returns is stronger over the long term. This makes them ideal for investors aiming to build significant wealth over time. The lower deductions ensure that more of the invested money remains in the fund, enhancing long-term financial growth.
  • Reduced chance of misleading advice: With direct mutual funds, investors avoid third-party intermediaries who may recommend funds based on commissions rather than suitability. This reduces the chances of being misled into investing in funds that do not align with their financial goals. Instead, investors can make informed decisions based on unbiased research and analysis.

Types of Direct Mutual Funds

Listed below are some types of direct mutual funds:

Stock Mutual Funds

These mutual funds invest in a diversified portfolio of stocks, aiming to provide investors with growth potential.

Bond Mutual Funds

These mutual funds invest in a diversified portfolio of bonds, aiming to provide investors with income and stability.

Money Market Mutual Funds

These mutual funds invest in short-term debt securities and aim to maintain a stable net asset value.

Balanced Mutual Funds

These mutual funds invest in a combination of stocks, bonds, and other assets to achieve a balanced investment portfolio.

Index Mutual Funds

These mutual funds seek to track the performance of a specific market index.

Specialty Mutual Funds

These mutual funds invest in specific sectors or industries, such as technology or healthcare.


How to invest in Direct Mutual Funds?

Investing in direct mutual funds is simple and can be done through official fund house websites, AMFI-registered platforms, or apps. To start, investors must complete their KYC (Know Your Customer) process, which includes submitting PAN, Aadhaar, and bank details. Once verified, they can access various direct mutual fund schemes.

After KYC approval, investors can visit the mutual fund company's website or use online investment platforms to select and purchase direct plans. They must choose between lump sum or SIP (Systematic Investment Plan) investments, depending on their financial goals. Direct plans provide a transparent view of fund performance without distributor involvement.

Once invested, tracking and managing direct mutual funds can be done through online dashboards or mobile apps. Investors can redeem or switch funds as needed. Since there are no intermediary charges, direct mutual funds offer higher returns over time, making them an attractive option for cost-conscious investors.

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Differences between a Regular Plan and Direct Plan in Mutual Funds

Here are some key differences between regular and direct mutual funds:

Feature

Regular Mutual Funds

Direct Mutual Funds

Distribution Channel

Sold through intermediaries like agents and brokers

Purchased directly from the asset management company

Expense Ratio

Higher expense ratio due to commissions for intermediaries

Lower expense ratio as no commissions are involved

Returns

Potentially lower returns after deducting expenses

Potentially higher returns due to lower expenses

NAV (Net Asset Value)

NAV may be slightly lower due to higher expenses

NAV tends to be higher as there are no distributor commissions

Investor Interaction

Investors may choose not have direct interaction with the fund house

Investors can directly communicate with the fund house

Transaction Convenience

Transactions can be done directly online or offline. May involve paperwork and intermediaries for transactions

Transactions can be done directly online or offline with the fund house

Mode of Investment

Often suitable for investors who prefer guidance and advice

Suitable for informed investors comfortable with self-research and decisions


Disadvantages of direct mutual funds

Here are some disadvantages of investing in direct mutual funds:

Disadvantages

Details

Challenge in scheme selection

In India, numerous AMCs offer a wide range of Mutual Fund plans, making it challenging to select the most suitable one. Direct Investors often base their choices solely on historical performance, neglecting other important factors.

Need for active decision-making

Continuous monitoring of the investment portfolio is essential, with adjustments made according to market conditions and the investor's financial objectives. However, Direct Investors may make suboptimal decisions at various stages, potentially hindering wealth accumulation.

Potential for investor bias

Direct Investors often develop biases that can impact their investment portfolio. For instance, they may focus on funds within the same category or those they have grown fond of, overlooking fundamental aspects such as asset allocation. This bias can lead to costly mistakes over time due to limited diversification and improper investment choices.


How to select Direct Mutual Funds for 2025

Before opting for direct mutual fund plans, take into account the following considerations:

1. Investment objective

Ensure that the mutual fund is in line with your investment objectives and risk tolerance, whether it aims for capital appreciation, income generation, or a combination of both.

2. Fund performance

Assess the fund's performance, particularly over the past five years, to gauge its consistency and potential.

3. Expense ratio

Direct plans typically boast lower expense ratios compared to regular plans, potentially leading to higher returns over time.

4. Diversification

Look for mutual funds with diversified asset allocations, as they could help mitigate risk and offer risk-adjusted returns in the long run.

Direct funds are ideal for investors who prefer a hands-on approach. Explore Top-Performing Mutual Funds! and find the best investment opportunities today.

Taxation on Direct Mutual Funds

The taxation guidelines for direct mutual funds are as follows:

  • The taxation of capital gains from mutual funds varies depending on the fund type and the duration of the investment holding.
  • Mutual funds investing 65% or more in equities or equity-related instruments are categorised as equity funds for taxation purposes, while the remaining funds are considered debt funds.
  • Short-term capital gains (STCG) on equity funds incur a flat 15% tax rate, whereas long-term capital gains (LTCG) are subject to a 10% tax rate. LTCG of up to Rs. 1,00,000 in a financial year is exempt from taxes.
  • For debt funds, capital gains are taxed according to the investor's applicable tax slab, with the gains added to their taxable income.

Direct mutual funds strategies

Investing in direct mutual funds requires a well-planned strategy to maximise returns and minimise risks. Since direct plans eliminate distributor commissions, investors must take an active role in fund selection, portfolio management, and market analysis. Below are key strategies to optimise investments in direct mutual funds.

1. Goal-based investing

Investors should align their mutual fund investments with specific financial goals, such as wealth creation, retirement planning, or children’s education. Choosing funds based on investment horizon and risk tolerance helps in making informed decisions.

2. Diversification across asset classes

To manage risk effectively, it is crucial to diversify across equity, debt, and hybrid mutual funds. A well-balanced portfolio ensures stability during market fluctuations and enhances overall returns.

3. Regular portfolio review

Since market conditions change over time, investors must periodically review and rebalance their portfolios. This helps in maintaining asset allocation and optimising fund performance.

4. Systematic investment planning (SIP)

SIPs allow investors to invest small amounts regularly, reducing the impact of market volatility. This strategy promotes disciplined investing and benefits from rupee cost averaging.

5. Expense ratio consideration

Direct mutual funds already have lower expense ratios compared to regular plans, but investors should still compare expense ratios among different funds to maximise cost efficiency. Lower costs translate to better long-term returns.

6. Tax efficiency planning

Understanding the tax implications of mutual fund investments is essential. Holding equity funds for more than a year qualifies for lower long-term capital gains tax, whereas debt funds follow indexation benefits if held for more than three years.

Conclusion

Understanding the dynamics of direct mutual funds opens a gateway to a more cost-effective and transparent investment journey. Opting for direct plans empowers investors with lower expense ratios, potentially higher returns, and a streamlined investment process. By sidestepping intermediary commissions, investors gain financial advantages and maintain better control over their portfolios.

As the financial landscape evolves, embracing the simplicity and efficiency of direct mutual funds becomes a strategic move towards optimising investment outcomes. Choosing between regular and direct plans should align with individual preferences, financial goals, and the desire for greater financial control.

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Frequently asked questions

Which are the best mutual funds to invest in India?

The best mutual funds in India vary based on individual investment goals, risk tolerance, and time horizon. Researching funds with a consistent track record, strong management, and alignment with personal financial objectives can help identify suitable options.

How to find the best performing mutual funds in India?

To find the best performing mutual funds in India, investors can analyze factors such as historical returns, fund manager expertise, expense ratios, and consistency of performance over various market cycles. Utilising financial websites, consulting with financial advisors, and reviewing fund ratings can aid in the selection process.

What are direct mutual funds?

Direct mutual funds are investment schemes offered by Asset Management Companies (AMCs) directly to investors without involving intermediaries like brokers or distributors. They typically have lower expense ratios compared to regular mutual funds, as there are no commissions or distribution fees involved.

Which one is better regular or direct mutual fund?

Direct mutual funds often offer lower expense ratios, leading to potentially higher returns compared to regular mutual funds. However, regular mutual funds provide the convenience of distributor assistance and may be suitable for investors who prefer guidance and are willing to pay higher expenses.

Is Direct mutual fund safe?

Direct mutual funds are as safe as regular mutual funds in terms of investment security since both types of funds are regulated by market authorities. The safety of an investment primarily depends on the fund's underlying assets and the investor's risk tolerance, rather than whether it is direct or regular.

Which direct mutual fund is best in India?

The best direct mutual fund in India varies depending on individual investment objectives and risk preferences. Investors should consider factors such as fund performance, expense ratios, investment strategy, and consistency before selecting the most suitable direct mutual fund for their portfolio.

Is switching to direct funds good?

Switching to direct funds can be beneficial for investors seeking to optimize their investment returns and reduce expenses. However, it's essential to consider factors such as investment goals, risk tolerance, and the impact of any exit loads or taxes before making the switch.

What is the benefit of direct mutual fund?

Direct mutual funds offer lower expense ratios compared to regular mutual funds, leading to potentially higher returns for investors. By eliminating distributor commissions, direct plans ensure that investors retain a larger portion of their investment gains.

Can we convert regular mutual fund to direct?

Certainly, you have the option to switch either to the direct plan of the same mutual fund you have invested in or to any other direct mutual fund offered by the same Asset Management Company (AMC).

Do we get dividend on direct mutual funds?

Yes, investors in direct mutual funds are eligible to receive dividends. The fund manager may distribute dividends periodically based on the fund's performance and dividend declaration policy. These dividends are credited directly to the investor's bank account.

Why is Direct plan NAV higher?

Direct plan NAVs (Net Asset Values) are typically higher than regular plan NAVs due to the absence of distributor commissions and other expenses. Since direct plans incur lower expenses, more of the fund's assets are reflected in the NAV, resulting in a relatively higher value.

Which SIP is better, direct or regular?

The choice between direct and regular SIPs depends on investor preferences and financial goals. Direct SIPs often have lower expense ratios, potentially leading to higher returns over time. However, regular SIPs provide the convenience of distributor assistance and may suit investors who prefer guidance.

How to identify a direct mutual fund?

Identifying a direct mutual fund is simple. Direct plans are denoted as "Direct" or "Direct Plan" in the fund's name. Investors can also verify if they are investing directly by checking if any distributor commissions or fees are deducted from their investments.

What is a fund house or asset management company (AMC)?

A fund house, also known as an Asset Management Company (AMC), is a financial institution that manages pooled investments from multiple investors. These funds are allocated across various financial instruments such as stocks, bonds, and government securities. Some well-known AMCs in India include DSP Mutual Fund, SBI Mutual Fund, and Nippon India Mutual Fund. Currently, there are around 44 Asset Management Companies operating in India.

Who is a mutual fund distributor?

A mutual fund distributor is an individual or entity that facilitates transactions between investors and AMCs. Their earnings come from commissions paid by AMCs, which are deducted as a small percentage of the invested amount.

For example, if you invest Rs. 1,000 through a distributor, Rs. 10 may be deducted as commission, reducing your investment to Rs. 990. However, investing directly with an AMC eliminates these commissions, allowing your full Rs. 1,000 to be invested, potentially leading to better returns over time.

Can you buy direct mutual funds online?

Yes, direct mutual funds can be purchased online through the official website of the fund house or a Registrar and Transfer Agent (RTA). Investors can also use platforms like Mutual Fund Utilities (MFU) or stock exchange portals. However, if investing through a distributor’s platform, the option for direct plans is unavailable. When investing online, selecting the "Direct" plan ensures that no distributor commission is deducted.

How to invest in direct mutual funds offline

To invest offline, fill out a mutual fund application form and write "DIRECT" in the space designated for the distributor's ARN. If the ARN is prefilled, it can be struck off and replaced with "DIRECT" in bold. The completed form, along with the investment cheque or demand draft, should be submitted at the nearest mutual fund branch or RTA office for processing.

Is it beneficial to invest in direct mutual funds?

Yes, investing in direct mutual funds can be beneficial as they have a lower expense ratio compared to regular plans. Over time, this cost-saving translates into higher returns due to compounding. As a result, the same mutual fund scheme in a direct plan tends to generate better long-term returns compared to its regular plan counterpart.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

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