Direct plan in mutual funds

• Table of contents

• What is a direct plan in mutual funds?
• Benefits of investing in mutual funds direct plan
• Who should invest in mutual fund direct plans?
• Factors to consider before investing in a mutual fund direct plan
• How does a direct mutual fund work?
• Types of Direct Mutual Funds
• How to invest in Direct Mutual Funds?
• Differences between a Regular Plan and Direct Plan in Mutual Funds
• Taxation on Direct Mutual Funds

What is a direct plan in mutual funds?

Direct plans in mutual funds are investment options that allow investors to invest directly with the Asset Management Company (AMC) without involving intermediaries such as distributors or brokers. Since direct plans bypass intermediaries, there are no commissions paid for distribution and advisory services, resulting in relatively lower expense ratios and potentially higher overall returns for investors.

Benefits of investing in mutual funds direct plan

You must be intrigued about the benefits of investing in direct plans now that you understand the concept of what is a direct plan. Here are three potential benefits:

• Lower expense ratio: Because of the absence of intermediaries, mutual fund direct plans may entail a relatively lower expense ratio. This reduces the overall cost of managing the fund.
• Convenience: Investing in direct plans is relatively straightforward, with investors being able to purchase units directly from the mutual fund house through online platforms, mobile apps, or physical branches.
• Transparency: Since investors are dealing directly with the AMCs and there are no commissions paid to intermediaries, investors have a clear understanding of the total expense ratio and can assess its impact on overall investment returns.

Who should invest in mutual fund direct plans?

Now that you know the mutual fund direct plan meaning, you may be wondering if it is suitable for you. Direct plan investments can be suitable:

• You are an experienced investor who possesses a good understanding of the financial markets, investment instruments, and risk management strategies.
• You prioritise cost-efficiency and aim to minimise expenses in your investment portfolio by eliminating distributor commissions and intermediary fees.
• You are a Do-it-Yourself (DIY) investor who prefers to take a hands-on approach to investing.
• You want to manage your portfolio independently and can customise your investment strategies on your own based on insights provided by AMCs and fund managers.

Also Read: Direct vs Regular Mutual Fund: What’s the difference?

Factors to consider before investing in a mutual fund direct plan

• In-depth research: Investing in direct plans requires investors to conduct thorough research, analyse fund performance, and understand market dynamics to select suitable mutual funds.
• Risk management: While direct plans offer the potential for higher returns, they may also carry inherent market risks. Investors should diversify their portfolios across asset classes to mitigate risk and achieve the optimal risk-adjusted returns potential.
• Investment horizon: Direct plans are suited for investors with a long-term investment horizon, as they may offer significant benefits in terms of lower overall expenses over a long horizon.

How does a direct mutual fund work?

Direct mutual funds in India function without involving intermediaries or distributors in the investment process. Investors buy mutual fund units directly from the Asset Management Company (AMC), eliminating distributor commissions. This typically results in a lower expense ratio compared to regular plans. Over time, investors in direct plans may potentially achieve higher net returns due to reduced costs. The investment strategy and portfolio management remain identical to regular plans, with the only difference being the distribution model and associated expenses. Investors manage their investments independently through AMC websites or Registrar and Transfer Agents (RTAs).

Types of direct mutual funds

Direct mutual funds in India are available across multiple categories, similar to regular plans:

• Equity funds: These invest primarily in company stocks, offering potential for capital growth.
• Debt funds: These invest in fixed-income securities like government and corporate bonds, aiming for relatively steady income.
• Hybrid funds: These combine equity and debt investments to balance potential growth and income.
• Index funds and ETFs: These track specific indices, aiming to deliver returns in line with the index.
• Solution-oriented funds: These focus on financial goals such as retirement planning or children’s education.

Investors can select direct plans based on their investment goals, time horizon, and risk appetite.

How to invest in direct mutual funds?

Investing in direct mutual funds in India is a straightforward process:

• KYC compliance: Ensure your Know Your Customer (KYC) process is complete.
• AMC website: Visit the AMC's official website where you want to invest.
• Online account: Register and create an investment account.
• Select direct plan: Choose the mutual fund scheme and opt for the "Direct Plan" option.
• Investment amount: Enter the investment amount and choose a payment method such as net banking or UPI.
• Complete transaction: Review the details and confirm the transaction.
• RTA platforms: Investors can also use platforms like CAMS and Karvy (KFintech) to invest in direct plans.

By investing directly, investors retain more control over their portfolio and potentially benefit from higher returns.

Differences between a regular plan and direct plan in mutual funds

The main distinction between direct and regular mutual fund plans lies in the expense ratio and investment process:

• Expense ratio: Direct plans have lower expense ratios as they do not include distributor commissions, whereas regular plans have higher costs.
• Distribution: Direct plans are purchased directly from the AMC, while regular plans are bought through intermediaries.
• Returns: Lower expenses in direct plans can result in relatively higher net returns over the long term.
• Advisory services: Regular plans may include distributor-provided advisory services, while direct plans require investors to make decisions independently.
• Investor control: Direct plans provide investors with more control over fund selection and management.
• Suitability: Regular plans may be suitable for those who prefer advisory support, while direct plans can be beneficial for investors confident in managing their portfolios.

Taxation on direct mutual funds

The taxation of direct mutual funds in India follows the same rules as regular plans, based on the type of fund and holding period:

Equity funds:

Short-term capital gains (STCG) on holdings of less than 12 months are taxed at %. Long-term capital gains (LTCG) exceeding ₹1.5 lakh per financial year are taxed at 1.25% without indexation benefits.

Debt funds:

The capital gains (STCG) are taxed as per the investor’s income tax slab regardless of the period of holding.

Hybrid funds:

If the fund has 65% or more equity allocation, taxation follows equity fund rules. If the equity allocation is less than 65%, it is taxed as a debt fund.

Understanding tax implications is essential for making informed investment decisions in direct mutual funds.

Also Read: How to use mutual fund utility to invest in mutual funds online?

Conclusion

In conclusion, direct plans in mutual funds offer Indian investors the potential for enhanced returns by eliminating distributor commissions. While they require active management and financial awareness, the long-term benefits can be meaningful. By evaluating direct and regular plans alongside tax considerations, investors can make informed choices aligned with their financial goals. With access to the same diverse mutual fund categories, direct plans enable investors to build well-balanced portfolios. For those comfortable managing their investments, direct plans can be a beneficial approach to long-term wealth creation in India’s mutual fund landscape.

FAQs

What is a direct plan in mutual funds?

A direct plan allows investors to invest directly with the fund house, avoiding intermediaries. This leads to a lower expense ratio compared to regular plans.

How is a direct plan different from a regular plan?

Direct plans have lower expense ratios since they do not include distributor commissions. Regular plans factor in these commissions, making them costlier.

Do direct plans have any hidden charges?

No, direct plans do not have hidden charges. The expense ratio is transparently disclosed and is generally lower than that of regular plans.

Is Direct mutual fund safe?

Like all mutual funds, direct plans are subject to market risks. The level of risk depends on the underlying investments, not on whether the plan is direct or regular.

Is switching to direct funds good?

Switching may be beneficial for long-term investors due to lower expense ratios, which can potentially lead to higher returns. Consider your financial goals before making a decision.

What is the benefit of direct mutual fund?

The key benefit is a lower expense ratio, which can potentially improve long-term returns.

Can we convert regular mutual fund to direct?

Yes, switching from a regular plan to a direct plan is possible through redemption and reinvestment, though it may result in capital gains tax.

What are the tax implications of direct mutual funds?

Tax treatment is the same for both direct and regular plans. Taxes depend on the type of fund (equity, debt) and the holding period, as per Indian tax regulations.

Mutual Fund investment are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.