I have always stated that mutual funds (MF) are one of the best wealth creation products for the masses. These are one of the lowest cost products, well regulated and give you the benefit of diversification.
The good news for investors is from January 1, 2013 on-wards mutual funds on directive of SEBI have launched ‘Direct’ version of all existing mutual fund schemes.
What are ‘Direct’ Mutual Fund Plans?
Direct mutual fund schemes as the name suggest are for investors who invest directly with the mutual fund AMC.
Why you should prefer Direct Plan?
The direct plans have the same portfolio as their regular counterparts but the difference is in their expense ratio. In case of direct plans there is no brokerage or trail commission to be paid to intermediary [as the investment is done directly by investors] and this comes as saving for the investors in the MF scheme.
It has been just 3 months since launch of direct plans, so annual difference in returns between direct and regular plans is yet not clear. But estimates suggest direct plans could be could be cheaper by 0.25% to 0.75%. This means you can hope to get 0.25% to 0.75% more returns than the corresponding regular MF schemes.
It might not look very high savings but in long run this is good money. For example you would make additional Rs 1,250 to Rs 4,000 on Rs 1 Lakh invested for 5 years.
How to invest directly in Mutual Funds?
You can invest in direct plans of Mutual Funds both physically and online.
For Online you can invest through the respective Mutual Fund Websites. Most of Mutual Fund AMCs are offering online investment facility. You need either Debit card (which is activated for online transactions) or bank account which is activated for online transactions.
In case you are not comfortable with online investment option, you can download the application form from the respective MF website, fill it and submit it to either their Registrars address (Karvy/CAMS) or respective Mutual Fund Offices. In case the office is not near, you can also courier/post the filled up application form and cheque to the respective addresses.
In most Mutual Funds, you would need to do the first investment in physical form and would need to submit your KYC (Know Your Customer) document, a cancelled cheque and nomination form. Once you get the folio number, the subsequent investments can be easily done online.
The good thing is many large fund houses have started offering SIP, SWP facility online.
What is not Direct investing?
Here are some common channels of investing in Mutual Funds which are not considered as ‘Direct’ investment
Demat Account – Though you get the advantage of all investment through a single portal and consolidated portfolio view but investment through Demat account is not considered as direct investment.
Brokers/ Distributors/ Financial Planners – if you invest through your broker/ distributor or planner, the investment would not be considered direct.
Banks – Many people have the miss-conception that banks with similar names to Mutual fund AMCs are same entities. For example if you invest in HDFC Mutual Fund through HDFC Bank, it is not a direct investment. Here HDFC Bank is acting as broker to HDFC Mutual Fund and would get its commission.
Websites – I know of three websites which offer online investment in mutual funds. These are
The investment through them is not direct as they are brokers to the mutual funds.
- As you can see above there is savings to be made but this comes at the cost of convenience. You would be ready to do the paperwork related to KYC, change of address, nomination, etc yourself. Though these are not very tedious and can be done yourself, but in case you are not comfortable with this then you should take services of an intermediary.
- The selection of funds is the most important aspect of investing. So if you require help of any intermediary for deciding on which fund to invest, you are strongly recommended to avail their services.
- All the SIPs that you had done directly earlier are invested automatically in Direct Plan of the respective scheme from January 1, 2o13.
- You can switch from regular plan to direct plan of the same scheme but this would be treated as exit from the earlier scheme and investment in a new scheme. This might lead to exit load and capital gains depending on your investment tenure.
- You don’t need a demat account to invest in Mutual Fund Scheme.