How Can You Invest In Direct Mutual Funds?

resr 5paisa Research Team

Last Updated: 27th June 2023 - 10:47 am

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An investor should know how to invest in direct mutual funds as these enable them to save on expenses that they would have had to pay otherwise. Mutual funds introduced direct plans for their schemes from January 2013, upon being nudged by the Securities and Exchange Board of India. Under the direct plan, investors don’t have to pay a commission for availing services of distributors, making their return higher. Of course, they will miss on the services provided by distributors, but all investors may not need such service.

Before 2013, investors had to pay a commission to distributors whether they were using their services or not. This led to high expenses even for investors who were choosing mutual fund schemes on their own.

What are Direct Mutual Funds? 

Direct Mutual Funds, or direct plans, allow an investor to invest directly without involving agents such as brokers or distributors. Since the investors purchase units of a mutual fund scheme directly, the expense ratio in a direct plan is much lower, helping increase the return.

On the other hand, regular mutual funds involve distributors that earn commissions and fees for distributing the mutual fund to investors. These commissions and fees are then added as expense and deducted from the investor's returns, leading to a higher expense ratio in regular plans.

Investors in direct mutual funds need do their own research, make investment decisions, and directly manage their investments. A person can invest in direct plans through the website of a mutual fund company or many other online platforms.

Direct Plan Investing Through AMCs

Walk into the nearest office or Investor Service Centre of the AMC of your choice. If you are a first-time investor, then you will have to complete your KYC and you will be allotted a ‘Folio Number’. Once a folio number is allotted, subsequent investments can be done online. Ensure that you specifically check the Direct Plan box in your application. The only challenge in this approach is that you will have to obtain a distinct folio number for each AMC.

Direct Plan Investing Through Fund Registrars

Registrars are the record keepers and folio managers of all mutual fund accounts. There are two key players in India Kfin Technologies and CAMS. You can register with either registrar online to invest in Direct Plans. Of course, when you approach a registrar, you can only invest in funds for which they are the registrars. In fact, when you submit an application to your AMC, it is processed by the registrar only. So, this is an extension of the first method.

Leveraging MFU and Fund Aggregators

MF Utilities (MFU) and aggregators are an agnostic platform to invest in mutual funds. You will have to take a one-time registration and obtain a Common Account Number (CAN). Once the CAN is obtained, you can map all your existing folios to that particular CAN and they would be treated as Direct Funds.

The advantage is that you don’t have to interface with multiple AMCs and the MFU aggregates and gives you requisite analytics for better decision making. The challenge is that you can only deal in the funds where the AMCs have tied up with the MFU. This platform is convenient and centralized.

Direct Plan Investing Through Investment Advisors, Online Direct Investment Portals

The challenge in the above three methods is that you still have to be self-driven. As an investor you need to take all the decisions including screening, selecting and ensuring that funds are in sync with your long-term goals. One alternative is to go through the online platform of a Registered Investment Advisor or through a Robo Advisor. These platforms provide investment recommendations to investors on the basis of certain details keyed in by the investor.

Direct Plans Of Mutual Funds – How To Make The Choice?

Investing through Direct Plans requires that you are comfortable with a self-driven approach to investing in mutual funds. While mutual funds offer diversification and professional management, they are also exposed to the vagaries of the markets and macros. You must be confident to handle these gyrations. Ideally, Direct Plans are for investors who have the time, wherewithal and resources to spend in making investment decisions. Otherwise, you are better off opting for a Regular Plan and letting your broker advice you appropriately.

Conclusion

In times of internet when all the research material is available directly to investors, it does make sense for them to invest in direct plan and save on expense ratio. But do remember that this route is meant if you do the research properly.

It's important to note that both direct and regular mutual funds invest in the same underlying assets and follow the same investment strategy. The key difference lies in the expense ratio and the mode of investment. Investors should carefully consider their investment objectives, knowledge, and comfort level before choosing between direct and regular mutual funds.

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