If you are new to mutual funds and are contemplating to invest in these diversified financial instruments — then one of the first decisions that you need to take is to whether to opt for direct mutual funds or for regular schemes.
Before we explain the process of opening a direct mutual fund, we would first describe the key distinctions between the two categories of mutual funds.
Direct versus regular mutual fund
A direct mutual fund plan has a lower expense ratio vis-à-vis a regular plan, as there is no distributor and agent involved. Hence, investors can save more by investing in direct mutual fund because one can save the money which is otherwise spent as distribution cost and commissions paid to the distributor or agent. These savings are added back to the returns of the scheme.
Consequently, a direct plan has a separate net asset value (NAV), higher than that of a regular plan. But one must remember that direct and regular plans are not different plans and both are part of the same mutual fund scheme, hold the same portfolio and are managed by the same fund manager.
The only difference lies in the different expense ratios, states the AMFI's financial educational initiative mutualfundsahihai.com.
A direct mutual fund is the one that you open directly with an asset management company (AMC), and regular mutual fund scheme is the one that you open via an agent or distributor.
How to open a direct mutual fund?
To be able to open a direct mutual fund, one must open an account directly with the fund house, or asset management company (AMC).
At the AMC’s website, one has to create an account in which one must enter the basic information, and registration details. After entering this, one has to enter miscellaneous personal and address details.
Finally, one has to enter the bank account details so that one can transfer the money to the fund house and back.
One can also invest in direct mutual fund via online platforms of stock exchanges, other digital channels or mutual fund utility (MFU).
It is imperative to mention that a number of online portals enable investors to invest across mutual fund houses but they don’t necessarily facilitate investing in direct mutual fund schemes.
At the same time, there are some online platforms that enable investors to invest in direct mutual funds but they charge a fee to invest for financial planning services.
Direct account via physical form
One can also invest in direct plan using a physical application form, which can be submitted by the investor service centre/branch of the concerned mutual fund or its registrar and transfer agent (RTA) along with the cheque or demand draft
However, while filing up the form — be it online or offline — it is important to tick the box for direct plan while opting for direct plan.
While filing out the physical form, one should strike out the box at the top of the form which is meant for distributor code, and instead write the word ‘Direct’.
However, one must remember that investing in direct mutual funds is advisable only for the DIY (do-it-yourself) investors who are familiar and well-acquainted with different kinds of mutual fund schemes and are fully aware of what they want to invest into.