Sharekhan Blog

What are Direct Mutual Funds?

  • Apr 30, 2024

In direct plans, retail investors are responsible for researching potential funds and sectors based on their investment objectives, risk appetite, and expected returns.

Instead of relying primarily on advisors to suggest appropriate schemes, individuals assess market conditions to identify funds that may align with their needs and goals. They then invest targeted amounts directly with the asset management firm through digital platforms.

In this article, we will learn about the benefits and limitations of direct mutual funds, their suitability for investors, and how to invest in them.

Direct Mutual Funds

Direct mutual funds allow individual investors to invest directly with asset management companies instead of routing investments through third parties like banks, brokers, or distributors. Direct plans feature lower expense ratios than regular mutual fund options by avoiding intermediary commissions and distribution fees.

In direct mutual fund investment, the responsibility lies more on the investor to research investment options before directing funds to the asset management firm. This contrasts with more guided investing through financial advisors who suggest specific funds and handle transactions on the client's behalf.

Lower Operating Costs

One of the main advantages of direct mutual funds is that they avoid commissions charged by brokers and distribution partners. These commissions are essentially bundled into the expense ratios of regular mutual funds, covering promotional activities, marketing material, incentive trips, brokerage, trail fees, and more. This can amount to a 0.5-1% difference in expense ratio.

Over long-term investing horizons, these savings compound into significant gains. Assuming identical fund performance, direct funds provide higher post-fee returns simply by avoiding additional layers of fees. This advantage appeals strongly to cost-conscious investors looking to maximise portfolio gains.

Convenience of Online Management

Leading fund houses like ICICI, HDFC, Axis, and more offer investors the ability to browse and invest in direct mutual fund platforms online through website portals or mobile apps. This allows investors to compare historical returns and portfolio allocations across different schemes easily.

Once invested, tracking investments through monthly statements also proves more convenient through direct channels versus relying on updates from intermediaries. Investors save time directly logging in online to monitor investments instead of coordinating with external parties.

Suited for Informed Investors

Unlike investing through brokers who provide financial advice, investing directly in mutual funds requires individuals to spearhead their investing approach. This makes direct funds better suited for informed investors with the time and capability to research markets and evaluate optimal asset allocation strategies.

Direct funds benefit investors who prefer having more control over portfolio construction rather than relying predominantly on broker recommendations. For novice investors who are still learning the ropes of evaluating quality funds and sector trends, having guidance from financial advisors may hold more value.

How to Invest in Direct Plans?

Investing in mutual funds direct plan follows a simple process:

1. Browse and compare historical returns across different schemes on fund house websites to shortlist options

2. Analyse portfolio composition and expense ratios to select funds aligning with investment goals

3. Register for online account access directly via the fund house website

4. Complete KYC documentation, including PAN card, address proof, and bank details

5. Transfer funds online via net banking or UPI to invest targeted amounts

The main difference from investing through regular channels lies in the direct interface with the fund house instead of funnelling transactions via an external broker.

Risks to Consider

While direct funds come with multiple advantages, they also pose a few additional considerations for investors:

1. Requires more time and effort spent researching investment options without expert guidance

2. Potentially more difficult to switch between schemes if invested in multiple funds

3. Missing out on financial advice around asset allocation and portfolio construction

4. No hand-holding for form-filling, documentation, or general investment queries

Therefore, for investors who prefer advisory services and want to outsource fund selection and paperwork, direct funds may not suit their needs.

Conclusion

Direct mutual fund plans appeal more to cost-conscious investors who are hands-on with managing their portfolios. Novice investors may benefit more from the advisory services of brokers despite the slight expense of the premium ratio.

For many, the optimal path forward lies somewhere in between. Some investors use a mixed approach for investing a core portfolio of components into direct funds for stability and cost savings while allocating a smaller portion to regular funds for tactical advice. Finding the right balance depends ultimately on each investor's confidence, capability, and preference for advice.


Team Sharekhan
by Team Sharekhan

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