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Direct Mutual Fund Plans

What are Direct Mutual Fund Plans?

When an investor invests in a mutual fund directly with an Asset Management Company (AMC) without the involvement of any broker, distributor, banker or any kind of intermediary, it is known as a Direct Mutual Fund Plan. The investor can perform the transactions simply by visiting the office of the mutual fund house or by visiting the official company website. Direct Plans have been instituted for the following mutual fund schemes:

  • All schemes that are open-ended, except discontinued plans and Exchange Traded Funds (ETFs).
  • NFOs (New Fund Offers) of Capital Protection Oriented Schemes or Fixed Term Plans under close-ended schemes and open-ended mutual fund schemes (except ETFs) which have been launched on or after the Effective Date.
  • Interval Income Schemes that have commenced from day 1 of the specified transaction period that immediately succeeds the Effective Date.

Direct Mutual Fund plans were introduced in January 2013 by the Securities and Exchange Board of India (SEBI) and as per a directive issued, all mutual fund firms have to compulsorily offer ‘direct plans’ for all its schemes in addition to its ‘regular plans’.

What is a regular mutual fund plan?

This type of mutual fund involves a ‘middle man’, often referred to as a broker, agent, a mutual fund distributor or relationship manager who will offer guidance and perform all the operational tasks on behalf of the investor. These middlemen charge a commission from the mutual fund house, the cost of which is added to the cost of the plan and due to this, regular mutual funds tend to be more expensive than the direct mutual fund plans.

Though expensive, a regular plan does offer some benefits and we’ve listed them below:

  • Recommendations on investment - For beginners who do not have much idea about mutual funds, the agent may be able to provide useful recommendations on the choice of funds which can help the investor fetch good returns.
  • Investment services - In a regular type of plan, the mutual fund advisor can help the investor in reviewing and rebalancing his/her investment portfolio which will boost the performance of the holdings. Over time, the returns on the investment may consequently get higher.
  • Additional services - The advisor may offer additional services to the investor like keeping a track of the portfolio, facilitating the investment, account changes, etc. This will not just save the time and effort of the investor but also ensure that he/she does not neglect his/her portfolio resulting in poor returns.

Regular mutual fund investments are done through the Distributor’s AMFI Registration Number (ARN) and are beneficial for those who do not possess deep knowledge about the mutual fund market.

How is a Direct Mutual Fund plan different from a Regular Mutual Fund Plan

  • Expense Ratio - Direct Plans have a lower expense ratio compared to Regular Plans. This is because it does not include costs such as commission, distribution expenses, etc. Lower costs translate to better returns on investment.
  • NAV – Net Asset Value is different for direct and regular plans. Since direct plans have a lower expense ratio, the NAV for a direct plan is higher.
  • Returns – the Compounded Annual Growth Rate of Direct Funds are higher than that which has been recorded for funds falling under the Regular Plan. This difference in returns is highest in the case of Equity Oriented Mutual Fund Schemes.
  • Guidance - In a Direct plan, the investor will have no guidance and has to carry out his/her own research on the investment options. The investor will have to count on the independent research reports and also perform all the investment related transactions like portfolio review, account changes, etc. by himself/herself.

Features of Direct Mutual Fund Plans

  • Mutual Fund brokerages or intermediaries are not involved.
  • There are no trail fees, commission, distribution fees, etc. that has to be paid by the investor. This reduces the expense ratio and impacts the returns on investment positively.
  • When the investor makes an SIP investment or any other lump sum investment, transaction fees are not charged on the same. This is because the transaction is made directly with the concerned AMC.
  • Direct mutual fund plans have a separate Net Asset Value (NAV). The mutual fund scheme will have “Direct” at the end of its name/description to identify it from the regular plans.

What are the advantages of opting for a direct mutual fund plan?

Direct Plans are ideal for mutual fund investors who wish to make direct transactions with an AMC without dealing with brokerages or intermediaries. This is also ideal for those who wish to reduce the expense ratio on mutual fund investment. If the investor can handle the documentation process such as portfolio consolidation, submission of mutual fund applications, nominee inclusion, tracking fund performance, KYC documentation, etc., they can go for a direct plan.

How to invest in Direct Mutual Fund Plans

In order to invest in a Direct Plan, you should get in touch with a branch of an Asset Management Company and submit the necessary KYC documents. At this time, you can enable online transactions by registering for the same and conduct all subsequent transactions online. Online services include purchase of assets, redemption, cancellation, etc. Banks act as distributors for fund houses, so approaching a bank is not a Direct Plan for Mutual Fund investment. Investors can purchase Direct Plans through AMC websites as well. All you have to do while filling the online application form, is to choose the mode of investment as “Direct” instead of “Through Distributor”. If this option is not provided, the investor can write “Direct” in the space requesting for the distributor’s ARN code.

GST rate of 18% applicable for all financial services effective July 1, 2017.

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