When you plan to start investing via mutual funds, you would encounter direct mutual funds and regular plans offered by the fund houses. Which one would you choose and why?
What do these plans entail, and how are they different? The following article gives a brief overview of these questions and also provides information on how to invest in direct mutual funds.
What is a direct mutual fund or direct plan?
A direct plan, as the name suggests means to invest directly into the mutual fund without any intermediaries – distributors, agents, brokers, etc.
The direct and regular plans only differ in terms of the expense ratio, which is the management fees paid from your portfolio.
The plans have a portfolio and are also managed by the same fund manager. Direct plans can be analogous to buying a pair of shoes from the brand’s factory outlet whereas regular plans would be buying it at the retail store.
In the former case, you are purchasing directly from the manufacturer and hence would have a lower purchasing price.
Similarly, in regular plans, the higher expense ratio is attributed to the distribution or commission charges by the intermediary.
Why should invest in direct mutual funds?
Direct plans have a higher NAV as a result of a lower expense ratio than their regular plan counterparts. These returns or differences get compounded over the years and could lead to a significant difference in the value of the investment at the end of the time period.
As shown in the figure, the initial investment in both plans is Rs 50,000.
However, the plan with a lower expense ratio amounts to a larger corpus of Rs 12 lakhs after 30 years, whereas the plan with a higher expense ratio amounts to a corpus that is Rs 1.5 lakhs lesser than the former plan.
However, direct plans are targeted at those investors who have a fine acumen on the nuances of the market and hence can make an informed decision on the choice of the fund – these investors can be called do-it-yourself investors.
In the case of market downturns and sudden volatility, it is always advisable to have an experienced player such as a mutual fund distributor to guide you through your investments – for a fee.
How to invest in a direct mutual fund or direct plan?
Once you have decided which fund to invest in, the investment into the Direct Plan of the mutual funds can be made using any of the following routes:
1. Asset management company or AMC
One can invest through this offline/traditional route by visiting the fund house for the first time to complete the KYC formalities if you are not KYC (Know your customer) compliant. An account will be thus opened which will hereafter contain your investments.
The fund house will provide an online option for the next investments and hence you would not be required to visit the fund house in an offline mode again.
To find the nearest office of your preferred fund, you can visit the AMFI website, where you can obtain the location and contact numbers of these centers.
2. Registered investment advisors
They are individuals who provide financial advice that is tailored to your investment objectives, risk appetite, the affordability of schemes, etc.
These professional advisors smoothen the process of investing by helping you fill in the application form and submit the same to AMC.
They charge a management fee in exchange for the services provided. However, it is always advisable to screen the track record of these individuals before approaching them with your hard-earned money.
3. Mutual fund agents & distributors
These organizations are intermediaries in the value chain of investments, analogous to the Kirana stores (where AMCs are your FMCG companies that produce the product, and these Kirana stores provide you with the convenience to buy them at your doorstep).
The distributors are typically banks, small financial advisory companies, stockbrokers, and individuals – and they are registered with the Association of Mutual Funds in India (AMFI).
Similar to the RIAs, the distributors bring in the application to the investors and submit them back to the respective fund houses. These agencies charge a flat fee for their services.
4. Registrar and transfer agents (RTA)
These institutions maintain detailed records of the investments and the investor’s transactions on behalf of the AMCs or the fund houses.
Transactions include buying and selling units, updating the personal information of the clients, redeeming funds, switching funds, etc.
These backend tasks are tracked and recorded by the RTAs and are typically outsourced by the fund houses. They provide services and required information to the investors on behalf of the AMCs. One can invest in direct mutual funds through these agencies.
5. CAMS
CAMS is a leading RTA that provides the investor with a web portal and mobile application through which he/she can independently transact without the help of any agency or service center.
It is a mutual fund agency with trusted shareholders – Acsys, NSE, and HDFC Bank Group.
6. Karvy
One of the largest Registrar and Transfer agents. It provides a single window to transact and assist its customers in the investment process. The agency has over 70 billion accounts and offers multiple other services.
One can also visit the locations of these agencies to complete the registration process. Click on the links to find the nearest Karvy office and CAMS office.
5. Mutual fund utilities (MFU)
This is a shared and innovative platform by the Mutual Fund industry, which is used by all the Indian AMCs. The platform enables easier and more convenient tracking of investments for the investor.
It gives the option to create a common account through which transactions can be made to multiple schemes in various funds (Which are the participants of MFU).
With your PAN and other KYC details, the platform will map all the details of the Accounts linked to your PAN, hence consolidating all your investments in one place and making it your single point of reference.
A Common Account Number (CAN) is a unique id created for an investor (similar to your bank account number). To obtain this, the investor must complete the KYC process. One can invest in Direct mutual funds through this platform.
Conclusion
While selecting any of the routes for your investments ensure that you weigh the pros and cons of each of the options.
Direct plans are preferred and considered economical for their low expense ratios, which have a noticeable effect in the long term and amount to a high magnitude as high as denominated in lakhs.
Consult an expert advisor to get the right plan
FAQs
What is a direct mutual fund?
A direct plan, as the name suggests means to invest directly into the mutual fund without any intermediaries – distributors, agents, brokers, etc.
The direct and regular plans only differ in terms of the expense ratio, which is the management fees paid from your portfolio.
Why Should One Invest In Direct Mutual Funds?
Direct plans have a higher NAV as a result of a lower expense ratio than their regular plan counterparts. These returns or differences get compounded over the years and could lead to a significant difference in the value of the investment at the end of the time period.
What is the difference between direct mutual funds and regular mutual funds?
Direct Plan allows the investor to invest directly with the AMC without any broker or distributor involvement. In a regular mutual fund plan, the investor invests via an intermediary such as a distributor, broker, or banker who is paid a distribution fee by the AMC.
Is it safe to buy direct mutual funds?
Yes, it is the safest way to invest in the stock market. Direct mutual funds are managed by SEBI-registered AMCs that allow investors to enter the market in a relatively safe manner.
What are the disadvantages of direct mutual funds?
The biggest disadvantage of direct mutual funds is the lack of financial help while selecting mutual funds. There are many AMCs in India and thousands of mutual funds offered by these establishments.
Any new investor is likely to suffer choice fatigue.
