What are Direct Mutual Funds – Benefits, Taxation & How To Invest
People are gradually becoming aware of the numerous benefits of mutual fund investments. As a result, more and more Indians are resorting to putting their money to work in mutual fund schemes. These schemes can be broadly categorised into two types of plans – direct and regular.
In this blog, we have explained the features and benefits associated with direct mutual fund plans. Let’s dive in!
What is a Direct Mutual Fund?
Launched in 1 January 2013, Direct mutual funds are mutual fund schemes directly offered by AMCs (Asset Management Companies) or fund houses. Investors directly invest in these mutual funds (direct plan) instead of involving an agent or distributor (regular plan). Direct funds also have a lower expense ratio and higher NAV (Net Asset Value) compared to regular mutual funds.
These schemes provide experienced investors with the freedom to invest directly in a scheme without taking the help of third-party agents such as brokers and distributors. They also carry a lower Total Expense Ratio (TER) as AMCs (Asset Management Companies) don’t have to pay distribution fees or commission charges.
Types of Direct Mutual Funds
You can purchase every type of mutual scheme via a direct or regular plan. Here are some of them:
- Stock Mutual Funds: These mutual funds invest in a diversified portfolio of stocks, with the goal of providing investors with growth potential.
- Bond Mutual Funds: These mutual funds invest in a diversified portfolio of bonds, with the goal of providing investors with income and stability.
- Money Market Mutual Funds: These mutual funds invest in short-term debt securities and seek to maintain a stable net asset value.
- Balanced Mutual Funds: These mutual funds invest in a combination of stocks, bonds, and other assets in order to achieve a balanced investment portfolio.
- Index Mutual Funds: These mutual funds aim to track the performance of a specific market index.
- Specialty Mutual Funds: These mutual funds invest in specific sectors or industries, such as technology or healthcare.
Investors can choose from a variety of mutual fund types depending on their investment goals and risk tolerance. It is important to carefully consider your investment objectives and do your own research before choosing a mutual fund.
Features of Direct Mutual Funds
Listed below are some of the features of direct mutual funds:
- Investors can invest in direct funds via both online methods and offline methods.
- People don’t have to rely on the guidance of third parties for direct fund investments.
- AMCs do not charge distribution fees as they are not required to pay commission to anybody. This reduces the expense ratio, which is quite beneficial for investors.
- Direct funds do not carry transaction charges.
- Individuals can understand which scheme is a direct scheme as the word ‘direct’ is used as an identifier.
Benefits of Investing in Direct Mutual Fund Plans
Here are some of the benefits of investing in direct mutual fund schemes:
1. Low-cost Option
A direct plan is a cost-effective way of investing in mutual fund schemes. Asset management companies do not need to pay any commission to third-party agents. This, in return, lowers the expense ratio, which has a positive impact on investors’ net returns.
2. Higher NAV
Since there is no intermediary in direct plans and lower expenses, it reflects in better returns. Since the returns could be potentially better in a direct plan, the NAV is also higher compared to regular plans.
3. Potentially Better Returns
It is not necessarily the case that direct mutual fund plans will always give higher returns than regular mutual fund plans. That being said, direct mutual funds may potentially offer higher returns to investors due to the fact that they do not have sales charges or commissions.
4. No Conflict of Interest
Agents and brokers often influence investors to opt for schemes for their benefit. But, direct fund investments eliminate chances of conflicts of interest as third-party distributors or brokers are not involved.
How to Invest in Direct Mutual Funds?
Discussed below are the three main ways to invest in a direct mutual fund–SIP, lump sum and STP:
1. Investing via Lump sum
Investors who wish to invest a large sum in a single investment can go for lump sum mutual fund investments. However, to make such investments, the concept of ‘timing the market’ has to be understood carefully, and in this regard, investors can consider consulting financial experts.
2. Investing via SIP
SIP (Systematic Investment Plan) investments are an ideal investment option for those starting out on their mutual fund investment journey. For SIP investments, you have the flexibility to choose the investment amount. For instance, AMcs like Navi allows you to make SIP investments with just Rs.10!
3. Investing via STP
A prerequisite for investing via STP (Systematic Transfer Plan) is that the investments should be in the same AMC. STP is best suited for those investors who have already invested in a particular mutual fund. Moreover, if someone has invested in a regular plan of a fund, he or she can transfer his investment to the direct plan via STP.
Who Should Invest in Direct Plans?
Investing in mutual funds requires adequate knowledge about the market, the risks involved, past performance of the fund, etc. Understanding these aspects is not that straightforward, especially for individuals who are new to the investing world. Hence, if you do not have the knowledge required to study and analyze the different mutual fund schemes, opting for a direct plan might not be a suitable option.
However, if you understand the concept of mutual funds and are capable of doing research and analysis on your own, you can reap various benefits by choosing a direct mutual fund investment.
Taxation of Direct Plans in Mutual Funds
As per provisions of the Income Tax Act, the returns earned on mutual funds are subject to capital gains tax, irrespective of whether individuals opt for a direct or regular plan.
1. For Equity-oriented Schemes
If you redeem your units in an equity-oriented scheme within 1 year from the date of purchase, the gains are known as short-term capital gains (STCG). A flat tax rate of 15% is applicable on the realised returns.
On the other hand, if investors sell their units after holding them for more than 1 year, the realized gains are subject to long-term capital gains (LTCG) tax of 10%. That said, keep in mind that no tax is imposed if LTCG doesn’t exceed Rs. 1 lakh.
2. For Debt-oriented Schemes
In case investors sell their units in a debt fund before the completion of 3 years from the purchase date, the gains earned by them are classified as short-term capital gains (STCG). These returns are taxed according to the income tax slab rate that is applicable for that individual.
However, if the holding period is more than 3 years, the returns earned attract a 20% long-term capital gains (LTCG) tax. Note that investors are eligible for indexation benefits in this case.
Also Read
Can You Switch from Regular Plans to Direct Plans?
Individuals can switch from regular plans to direct plans if they wish to do so. However, investors will have to incur some additional charges as this will be considered redemption from an old scheme to a new one.
Investing in Navi mutual funds is simple. Download the Navi app, explore a wide-range of low-cost funds, select mutual fund schemes of your choice as per your investment goals and start investing. Here are some of the benefits of investing with Navi Mutual fund:
- Star investing with Rs.10
- Low-cost funds
- Wide range of funds across sectors and geographies
Final Word
Direct plans in mutual funds are a cost-effective option for investors who want to maximise their long- term returns. However, one tip would be doing adequate research before investing in a mutual fund scheme.
*Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
FAQs
Ans:
• Asset Management Companies’ website
• Mutual fund utilities
• Through online platforms/ mobile-based applications
• Navi App
Ans: Mentioned below are the documents.
• PAN
• A bank account
• Cancelled cheque
• Aadhaar number
• Proof of address
• Proof of identity
Ans: There is no apparent disadvantage with direct mutual funds. Only you need to possess adequate knowledge about mutual funds to be able to choose the right schemes.
Ans: The TER or total expense ratio measures the total costs incurred while operating and managing a mutual fund. To get the value, you can divide the total cost of the fund with the fund’s total assets.
Ans: The expenses included are:
• Management fees
• Distribution fees
• Allocation charges
• Advertising costs, etc.
Ans: Direct plans give high returns and have a lower expense ratio than regular plans. Investors need to pay brokerage and commission to mutual funds distributors for regular plans, which results in a high expense ratio and lower NAV. Direct plans do not incur any such additional costs. Accordingly, they come with a lower expense ratio.
Before opting for a plan, individuals must determine what’s best for them based on certain aspects such as knowledge about the different financial instruments, economic scenario, and the ability to track the market. .
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
