4 Reasons To Invest In Direct Mutual Funds

 

Securities Exchange Board of India (SEBI) has come out with several reforms, keeping investors welfare in mind. One such reform was the introduction of direct plans in mutual funds.

Though many investors are familiar with direct plans in mutual funds, they are uncomfortable while actually investing in these mutual fund schemes. Many investors still have doubts regarding direct plans of mutual fund schemes.

 

Mutual Funds come in two variants:

1. Direct mutual funds: Invest in mutual funds directly via the AMC’s website.

2. Regular mutual funds: Invest in mutual funds through agents.

 

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4 Reasons To Invest In Direct Mutual Funds

Investors can invest in direct mutual funds through the mutual fund company (website). Regular mutual funds can be bought through mutual fund advisors, brokers or distributors/intermediaries.

 

When you buy a regular mutual fund, the mutual fund company pays a commission to the agent. This commission is an expense to the company and hence, recovered from the investors. That is why the expense ratio is higher for regular mutual funds compared to direct mutual funds. The expense ratio measures the costs incurred by the company to operate a mutual fund.

 

Investors earn approximately 0.5% higher on equity mutual funds and 0.2% higher on debt funds vis-a-vis direct mutual funds.

 

Investors who are familiar with mutual funds can invest in the direct plans of mutual funds schemes. Investors don’t prefer investing in direct mutual funds as they may not have the necessary knowledge or time to manage the investment. If you invest in direct mutual funds, you save on commissions paid to life insurance agents. 

 

There are no eligibility criteria to invest in direct mutual fund schemes. However, investors must be aware of risk appetite and financial goals to invest in direct mutual funds.

 

SEE ALSO: 10 Commandments For Investing In Mutual Funds

 

 Features of direct plan mutual funds:

 

• Investors can visit the Asset Management Company website and follow the process to invest in direct plan mutual fund schemes.

 

• Investment in direct plan mutual fund schemes is done without involving distributors or mutual fund brokers.

 

• No distribution fees or trail fees are payable to mutual fund brokers on investing in direct plan mutual funds.

 

• Expense ratio is lower as compared to regular plan mutual fund schemes.

 

• Direct plan mutual funds give around 0.5% to 1.5% a year higher returns compared to regular mutual fund schemes.

 

• Investment in direct mutual funds does not attract transaction charges on lump sum investments or SIP (Systematic Investment Plan) investments as the transaction is done, directly with the AMC.

 

• Direct plans have a separate NAV (Net Asset Value) vis-à-vis regular schemes. Direct plan mutual fund schemes are denoted by “Direct” which is mentioned at the end of the description.

 

• Mutual fund houses pass on the benefit of the saved commissions to customers in the form of a higher Net Asset Value.

 

4 Reasons To Invest In Direct Mutual Funds

 

1. Both direct plan mutual funds and regular plan mutual funds have an identical underlying portfolio. The fund managers follow the same investment strategy in both investment options.

2. Direct plan mutual funds have a lower expense ratio. Therefore, investors can earn higher returns in a direct plan compared to a regular plan. Even a 0.5% difference in expense ratio amounts to a huge saving in the long run

3. Long-term investments in direct plan mutual funds harvest rich rewards over 15- 20 years through the power of compounding.

4. Investing in direct mutual funds requires investors to do their own analysis and select top-performing mutual fund schemes. Therefore, investors enhance their knowledge on financial markets.

Investors must be KYC (Know Your Customer) complaint, to invest in direct mutual funds.

 

SEE ALSO: Things To Keep In Mind While Investing In Equity Via SIPs

 

Documents required to invest in direct mutual funds:

 

1. Investors should have PAN, Aadhaar number.

2. Investors should furnish bank account details along with the Magnetic Ink Character Recognition (MICR) and Indian Financial System Code (IFSC) details.

3. One recent passport size photograph

4. Identity proof

5. Address proof: Self-attested. Originals needed for verification.

 

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