How to Invest in Mutual Funds Directly

Recently, the S&P BSE Sensex crashed by 900 points, while the Nifty 50 slipped below the 23,300 mark, triggering concerns among market participants. This sudden downturn has brought attention to how political and economic developments, including the Maharashtra state elections, could influence the market performance and impact investors' mutual fund portfolios.

The year 2024 has been eventful for the Indian equity market, with fluctuations driven by macroeconomic factors, global trends, and domestic political developments. The Maharashtra state elections hold considerable sway over India's political and economic landscape. Maharashtra is not just a political powerhouse but also an economic hub, contributing approximately 14% to India's GDP. The results of these elections on November 23rd, 2024, may influence market sentiment and investment trends.

[Read: How to Start Investing in Mutual Funds: A Comprehensive Guide]

Traditionally, investors have accessed mutual funds through intermediaries such as brokers or distributors, which come with additional costs in the form of commissions. However, with the rise of Direct Plans, investors now have the opportunity to invest in mutual funds directly through Asset Management Companies (AMCs) or online platforms.

Direct investing in mutual funds eliminates the intermediary charges, allowing investors to maximise their returns. If you are willing to take control of your investment decisions and save on costs, investing in mutual funds directly through Direct Plans might be an excellent choice for you.

In this article, we will explore how to invest in mutual funds directly, the advantages of Direct Plans over Regular Plans, and the various platforms available for making these investments.

Understanding Direct Plans in Mutual Funds

In January 2013, the Securities and Exchange Board of India (SEBI) mandated mutual fund companies to introduce Direct Plans alongside the traditional Regular Plans. Both plans invest in the same portfolio of securities, but the difference lies in the cost structure and how they are purchased.

Key Features of Direct Plans:

• No Distributor Commission:

  Direct Plans eliminate intermediary commissions, leading to lower expense ratios.

• Self-directed Investments:

  Investors are required to make their own decisions and directly interact with the Asset Management Company (AMC).

• Same Portfolio, Lower Cost:

  Both Direct and Regular Plans invest in the same underlying securities, but Direct Plans offer a higher return due to their lower cost structure.

Benefits of Direct Plans Over Regular Plans

1. Lower Expense Ratios

The expense ratio refers to the annual cost of managing a mutual fund. Since Direct Plans exclude distributor commissions, their expense ratios are significantly lower than those of Regular Plans. Even a small difference in expense ratios may result in substantial savings over the long term.

2. Higher Returns

The cost savings in Direct Plans translate into higher returns. For instance, if a Regular Plan provides an annual return of 12%, a Direct Plan of the same fund may offer a return of around 12.5% due to the lower expense ratio.

3. Transparency and Control

Investors opting for Direct Plans interact directly with the AMC, gaining full control over their investments. This enables better monitoring and a deeper understanding of the fund's performance.

4. Encourages Financial Awareness

Direct Plans encourage investors to research and understand mutual funds before investing. This helps build financial literacy and informed decision-making skills.

5. Better for Long-term Investors

The compounding effect of lower costs in Direct Plans is particularly advantageous for long-term investors. Over a long period, the savings from reduced expense ratios could add up to significant amounts.

[Read: Direct vs Regular Plan: Can Expense Ratio Make Significant Difference to Your Mutual Fund Returns?]

Ways to Invest Directly in Mutual Funds

Investing in Direct Plans of mutual funds is straightforward, and there are multiple platforms through which you can begin. Let's explore these options in detail:

1. AMC Websites and Mobile Apps

Investing directly through the AMC's website or mobile app is one of the simplest ways to purchase Direct Plans.

Step 1: Visit the official website of the AMC whose fund you want to invest in.

Step 2: Register yourself by creating an account. You will need your PAN, Aadhaar, bank account details, and contact information.

Step 3: Complete the KYC (Know Your Customer) process if not already done. This can be done online through the eKYC option.

Step 4: Select the fund and choose the Direct Plan option.

Step 5: Specify the investment type - Lump sum or SIP (Systematic Investment Plan).

Step 6: Make the payment and complete your investment.

2. 2. MF Utility (MFU)

MF Utility is an industry-supported platform that enables investors to transact in Direct Plans of multiple AMCs using a single account.

Advantages of MFU: Access to funds from multiple AMCs under one platform. Simplified investment, redemption, and portfolio tracking processes. It has Zero transaction fees for investing in Direct Plans.

Step 1: Register on the MF Utility platform and create a Common Account Number (CAN).

Step 2: Complete the KYC process.

Step 3: Login and select the mutual fund you wish to invest in.

Step 4: Choose the Direct Plan option and complete the transaction.

3. Online Investment Platforms

Several third-party platforms offer access to Direct Plans of mutual funds. One may consider online platforms since they have a user-friendly interface, tools for portfolio analysis and performance tracking, and they give you access to funds from various AMCs in one place.

Step 1: Create an account on the chosen platform.

Step 2: Complete the KYC process, often available online.

Step 3: Browse through the funds and choose a Direct Plan.

Step 4: Invest via lump sum or SIP.

4. Registrar and Transfer Agents (RTAs)

Registrars like CAMS and KFintech act as intermediaries for multiple AMCs, allowing investors to transact in Direct Plans. They provide access to a wide range of funds under one roof, offering centralised portfolio management.

Step 1: Register on the RTA's portal (CAMSonline or KFintech).

Step 2: Complete the KYC process.

Step 3: Select the fund and invest in its Direct Plan.

[Read: Best Platforms to Invest in Mutual Funds]

Can a Difference in Expense Ratio Significantly Impact Your Mutual Fund Returns?

The difference in expense ratios between Direct and Regular Plans of mutual funds may seem minor at first glance, but its long-term effects can be profound. You see, the expense ratio, which includes charges for fund management, marketing, and distribution, is typically 0.5% to 1% lower in Direct Plans compared to Regular Plans.

While a difference of 0.5% or 1% might not seem like a lot in the short term, over an extended investment horizon, these seemingly small differences can lead to substantial disparities in your investment returns, largely due to the power of compounding.

For instance, you invest Rs 10 lakhs in a mutual fund with a 12% annual return for 30 years. Now, let's compare how the difference in expense ratios between Direct and Regular Plans affects the end value of your investment.

As demonstrated, even a 0.5% or 1% lower expense ratio in the Direct Plan results in a massive difference. For an investment of Rs 10 lakh, the gap between the Direct and Regular Plan after 30 years can be as much as Rs 70 lakhs (Rs 2.99 crore - Rs 2.29 crore), highlighting the remarkable effect of compounding when the costs are kept in check.

Investing in mutual funds through Direct Plans is an excellent choice for those looking to maximise returns while minimising intermediary fees. The lower expense ratios, coupled with greater control and ease of access, make Direct Plans a smart way to build wealth over time.

While the process may require a bit more involvement than opting for Regular Plans, the benefits-such as saving on commission fees and having greater transparency-are well worth the effort. By leveraging online platforms and AMCs, investing in mutual funds directly has never been easier, making it an attractive option for both new and experienced investors looking to enhance their financial portfolios.

To conclude...

By eliminating intermediaries and commissions, Direct Plans empower investors to take charge of your financial journey. With multiple avenues such as AMC websites, MF Utility, online platforms, and RTAs, direct investing has now become more accessible than ever.

However, this path requires a proactive approach, including careful research and monitoring of the funds and their performance. By adopting the right strategy and staying informed, you can make the most of Direct Plans and achieve your financial goals efficiently.

So, take control of your investments today and start your journey toward financial independence with Direct Plans in Mutual Funds.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.