What Are Direct Mutual Funds

Direct funds are those mutual fund schemes that are directly offered by the fund house or AMC. The names of these funds are prefixed by the word 'direct'. Explore more in this blog.
EXPLORE FUNDS
Direct Mutual Funds
EXPLORE FUNDS
4 mins
06-June-2024

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 the ins and outs of direct funds and gives useful information to investors who want to make smart financial decisions.

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.

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.

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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.

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 Navi mutual funds is straightforward. Simply download the Navi app, browse through a diverse selection of cost-effective funds, choose mutual fund schemes aligned with your investment objectives, and initiate your investment journey. Here are a few advantages of investing with Navi Mutual Fund:

  • Begin investing with just Rs.10.
  • Access low-cost funds.
  • Explore a broad spectrum of funds spanning various sectors and geographic regions.

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 2024

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.

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.

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.

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Disclaimer

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.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.