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?
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 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.
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 centres.
2. Registered Investment Advisors
They are individuals who provide financial advice that is tailored to your investment objectives, your risk appetite, affordability of schemes etc. These professional advisors smoothen the process of investing by helping you fill in the application form and submitting the same to the 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 organisations 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, 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 of units, updating 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.
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 a service centre. It is a mutual fund agency with trusted shareholders – Acsys, NSE, HDFC Bank Group.
Karvy: One of the largest Registrar and Transfer agents. It provides a single window to transact and to assist its customers in the investment process. The agency has over 70 billion accounts and offers multiple other services.
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 convenient tracking of investments to the investor. It gives an 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.
While selecting any of the routes for your investments ensure that you weigh the pros and cons for 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 which amounts to the high magnitude as high as denominated in lakhs.