How Can You Invest In Direct Mutual Funds?

Mutual fund investment is a great way to enhance your wealth, but it doesn’t have to be complicated. With investors getting more aware of how factors such as expense ratios affect compounding, many investors raise the question: Whether they are getting the full value of the fees they pay or not? 

This shift has drawn rising attention towards Direct Mutual Funds. Unlike the traditional or regular mutual funds, the direct mutual funds offer a simple and more cost-effective approach. They allow investors to participate in mutual fund investments without paying the distributor fees, but with a lower expense ratio and improved control.

So, if you are also a keen investor who is looking for ways, How to invest in direct mutual funds correctly? Then, continue reading this blog to find out more about direct mutual funds and investment methods.

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What Are Direct Mutual Funds

In simple words, direct mutual funds are a mutual fund scheme in which an interested investor purchases mutual fund units directly from an Asset Management Company (AMC). Also, during this process, no intermediaries such as a broker, advisor, or distributor are involved.

While the investment strategy, portfolio, and fund manager remain the same as a regular mutual fund investment, the main difference lies in the expense ratio. 

Since direct mutual funds do not charge any commission or fees for intermediaries, investors can seek high returns on their investment.

Difference Between Regular and Direct Mutual Funds

As mentioned in the previous section, the portfolio of both types of mutual fund investments remains the same; the difference can be observed in the cost structures and long-term returns. 

To give you a more clear idea, let’s understand how direct mutual funds differ from a regular mutual fund investment. 

Let’s understand the difference through an example:

Suppose an investor invests ₹10,000 in a mutual fund, which offers annual returns of 10%. This means the investment has the potential to return an amount of ₹11,000 in one year. However, the actual return depends on the expense ratio charged according to the type of mutual fund.

So, if the investment is a regular mutual fund investment with an expense ratio of 2%, then it will reduce the return to 8%. That means at the end of the year, the invested amount grows to ₹10,800.

On the other hand, if the investment is a direct mutual fund investment, having an expense ratio of 0.5%, then the return will be 9.5%. Meaning, at the year's end, the investment reaches ₹10,950.

Benefits of Investing in Direct Mutual Funds

Now that you have understood the concept of direct mutual funds, here are some of its key benefits:

• The absence of an intermediary, distributor, or advisor automatically lowers the expense ratio, ultimately leading to a lower cost of managing the fund.
• Investors can purchase the fund directly from the AMC, through online or offline methods.
• As there is no commission paid to the vendor of the mutual fund, the Net Asset Value (NAV) becomes higher than the regular plans.
• The investor has full control over the direct mutual fund. (in terms of fund, investment strategy, and timing). There is no external influence.

How To Invest in Direct Mutual Funds: A Step-by-Step Approach

There are two ways to invest in direct mutual funds:

1. Online mode
2. Offline mode

Before we start discussing the step-wise approach for both modes, it is important to know the prerequisites for direct mutual fund investment.

Prerequisites of Investing in Direct Mutual Funds

• Research about the mutual fund in which you want to invest. This also involves knowing the AMC to which the fund belongs.
• Have a clear idea about the amount you want to invest in the direct mutual fund scheme. This helps in avoiding an unplanned increase in the investment.

Method 1: Investing Through An AMC Website (Online Mode)

For investors who are comfortable with handling online transactions, this method is quite straightforward. 

1. Open the mutual funds website or mobile application and create an account by filling in your KYC (Know Your Customer) details that also involves providing your PAN (Personal Identification Number) details. This step is for first-time investors. However, if you are KYC compliant, only your PAN details will be required. 
2. Create an account with the AMC by filling in the mandatory information required, just like in an application form.
3. The next step involves selecting the scheme. You will be presented with two scheme options: Dividend and Growth. You need to select between the two alternatives to initiate your direct mutual fund investment. Tip: In the Dividends scheme, the returns are paid periodically, whereas in Growth, the returns are reinvested to improve the value of your investment over time.
4. Choose between ‘Systematic Investment Plan’ or ‘Lumpsum’. Tip: A Systematic Investment Plan (SIP) requires an investor to invest a small, fixed amount regularly (usually monthly), whereas in a Lumpsum plan the investor invests a large sum of money all at once. At this stage, you also need to specify if a Registered Investment Advisor (RIA) is assisting you. If yes, then you must provide the RIA code and mention the mode of payment. 
5. Finally, the system will validate the details provided by you and confirm its accuracy. Several AMCs may also require you to authenticate your application by sending an OTP to your registered email address or mobile phone number. 
6. Lastly, complete the transaction by making the payment. Once it is successful, you will receive a confirmation on your email ID and mobile number.

Method 2: Investing Through Registrars & Transfer  (R&T) Agents (Online Mode)

1. Choose a reliable R&T agent. The best way is to select a Securities and Exchange Board of India (SEBI) authorized RTA, as they are responsible for managing transactions, communications, and records. Tip: CAMS, KARVY, etc are some of the well-known RTAs.
2. Complete all the KYC formalities by providing the PAN, address proof, and other essential documents.
3. Create an account with the selected RTA. Fill the application form by giving your details, as required.
4. Select the direct mutual fund scheme from the range of mutual fund options specified by the RTA. You can make your selection based on the performance, risks, and objectives. Here, you can also choose the Growth or Dividend option. 
5. Next, select the investment method: SIP or Lumpsum.
6. Lastly, after RTA has verified your details, make the payment, and you will receive a confirmation of your investment after the payment is processed.

Method 3: Investing Through Offline Mode

1. Visit the AMC branch office and manually complete the mutual fund form. Also, you need to undergo the KYC process if not compliant.
2. Along with the application form, you need to submit a self-attested copy of your PAN card, address proof, and a SIP form. 
3. Submit the forms along with the cheque or the demand draft in favour of the AMC to begin the transaction. 
4. You will be allotted a folio number and an account statement.

Conclusion

Direct mutual funds give you the ownership to invest and see how your money grows by removing the avoidable expenses (the commissions of the intermediaries). With a lower expense ratio, enhanced transparency, and increased cost efficiency, investors can achieve full control and clarity over their investment.