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Direct plans enable you to deal directly with the fund house, thereby bypassing distributors, which reduces your costs and potentially allows you to earn higher returns over the long run.
Have you ever wondered why two investors with the same mutual fund scheme may receive different returns over a ten-year period?
The solution is usually the plan they went with, rather than the performance in the market.
Direct mutual funds are plans that are sold directly by an Asset management company (AMC) without the participation of any third-party agent, broker, or distributor.
Since no commissions are paid, the plans are of a lower cost ratio than the “Regular” plans.
This article will discuss how to invest in direct mutual funds safely and efficiently, guiding you through the requirements and the online procedure.
Quick Answer
Direct mutual funds are funds you buy directly from the asset management firm (AMC) without a broker. They are less expensive and have lower expense ratios since there is no deduction of a distributor commission.
Investment requires completing your KYC verification using PAN and address documents, choosing an appropriate scheme based on your financial objectives, and making orders using the official portal of the fund house or its industry solutions.
You can invest as little as ₹500 in a SIP or ₹5,000 in a lump sum, and the units will be stored in a folio. The process to get acquainted with how to invest in direct mutual funds becomes simple for self-directed investors.
What You Need in India
It is essential to ensure that your Know Your Customer (KYC) records are centralized, approved, and that an active bank account is maintained for transactions before making an investment.
There are certain required statuses and documents that you must have in place before you can begin your journey.
To do this, the key thing needed is a Permanent Account Number (PAN) card and a valid address proof (Aadhaar or a passport). In India, all mutual fund investors have to be KYC compliant.
You can check your status through any Central KYC (CKYC) registry site. In the event of non-compliance with KYC, you will be required to undergo this verification procedure, which may be conducted through video authentication.
You must also have an active bank account in your name. This is an account which will be linked with your investment folio, where the amounts spent on investments will be debited, and the amounts received as redemption or dividends will be credited.
To establish Systematic Investment Plans (SIPs), you would have to authorize a one-time mandate (OTM) through Net Banking or UPI. It is worth noting that mutual funds do not require a Demat account.
Units may be stored in a Statement of Account (SoA), which is technically a digital ledger (folio) kept by the fund house. These are the initial steps towards learning how to invest in direct mutual funds in India.
Direct vs Regular Plan
The key distinction between the Direct and Regular plan is the expense ratio; a Direct plan is less expensive, as it does not have distributor commissions.
When you consider a mutual fund scheme, there are two variants of the scheme, which are the Direct Plan and the Regular Plan. Each one has the same portfolio, fund manager, and underlying assets. The disparity is in the cost structure.
In a Regular plan, the fund house pays a commission to the intermediary who has sold you the fund. Your investment will be recouped through this expense, bringing about an increased expense ratio.
In a Direct plan, no commission is paid. Even a 0.5% to 1% or 20% variation in the fees made over 10 or 20 years can have a significant impact on the growth of your money. Direct plans are typically suitable for investors who research and make their own decisions, or for those who pay separate fees for advice.
Note: The risk is the same, but the cost is reduced. You still need to determine whether the scheme aligns with your financial intentions.
Ways to Invest Online
Investment in direct plans can be done either through the official site of the Asset Management Company (AMC) or through regular Registrar and Transfer Agent (RTA) sites.
The Indian digital space provides numerous secure platforms for conducting these transactions. The easiest way of doing so is by visiting the web portal of the particular fund house. In this case, you can open an account with the help of your PAN and begin investing instantly.
Alternatively, you can use industry-aggregated platforms that are offered by the RTAs (the organizations that keep records on behalf of mutual funds) that allow you to access multiple fund houses with just a single login.
Safety is the most important when knowing how to invest in direct mutual funds online. Before clicking pay, make sure you check the following:
- Scheme Name: Ensure that it aligns with what you are researching.
- Plan Type: It needs to clearly indicate the direct approach.
- Option: Select Growth or IDCW (Income Distribution cum Capital Withdrawal).
- ISIN: This is a unique code that identifies a scheme; a look at it makes you sure you are not purchasing another product.
Step-by-Step Process
The process of investing requires you to choose which scheme to invest in, what form of investment you would like to make, which is either SIP or Lump sum, and fill out the payment mandate.
Once you have completed your KYC and selected the platform of your choice, the process of actual execution is straightforward for the key process that helps you invest in mutual funds directly and successfully.
Choose a Scheme Aligned to Your Goals and Risk Profile
Set your goal before you transfer the money. Do you want to create wealth over the long run (Equity), store funds temporarily (Liquid/Debt), or do you want a combination of both (Hybrid)? Generally, equity funds tend to be more volatile and have greater potential for long-term growth, whereas debt funds tend to be less volatile.
Decide SIP vs Lump Sum
- SIP (Systematic Investment Plan): It is a way to deposit a constant sum on a regular (monthly) basis. It is valuable and helpful rupee-cost averaging, and it religiously saves your money. An e-mandate or NACH (National Automated Clearing House) instruction must be established so that the bank can automatically debit the amount.
- Lump Sum: This is an investment made in a single instance. It is particularly handy in cases where you have excess cash, such as a bonus or windfall.
Monthly SIP inflows experienced an impressive 48% year-over-year growth, increasing from ₹17,073 crore in November 2023 to ₹25,320 crore in November 2024, reflecting strong retail investor confidence in systematic investing.
Cut-Off Times and NAV (High-Level)
The Net Asset Value (NAV) which you are allocated is based on the timing of your application and when the funds were sent to the bank account of the AMC.
- Equity: Typically, when the funds are realized before the cut-off time (typically 3:00 PM) on a business day, you have the NAV of that day.
- Debt: Liquid funds have an alternative cut-off, which may result in funds being realized earlier (for example, 1:30 PM), based on the previous day’s NAV.
Confirmation and Tracking
Once the trade is made, a Folio will be generated (or modified when you already have one). You will receive our confirmation via email and SMS.
You will also receive a Consolidated Account Statement via email every month, allowing you to monitor all your mutual fund holdings across various fund houses.
Choose the Right Direct Plan and Options
When choosing a direct plan, you should also decide on the “Growth” option, where your compounding is selected, or perhaps the IDCW option, which is a periodic payout.
An area that often causes confusion among beginners is the field of Options in the application form.
You are expected to have two broad options: Growth and IDCW. Choosing the appropriate one is a crucial aspect of investing in a direct plan of mutual funds properly.
Growth vs IDCW (Dividend) – What Changes?
- Growth Option: The profits earned by the scheme are reinvested in the scheme. This boosts the NAV in the long run. Taxation occurs only when the units are redeemed.
- IDCW (Dividend): The plan gives you a fixed percentage of the profits periodically. The NAV decreases in the amount of the payout. Such payouts are taxable in your hands according to your income tax rate.
Direct Growth Mutual Funds – What “Growth” Means
The Growth option will be more efficient mathematically due to the compounding effect, which can help you create wealth.
When you look up how to invest in direct growth mutual funds, you are really just searching for the ‘Direct Plan – Growth Option.’ Under this mode, you are not provided with money in your bank account until you sell your units.
This enables your returns to earn additional returns in the years to come.
Switch from Regular to Direct
It is possible to convert a Regular plan to a Direct plan within the same scheme by submitting a switch request, which is treated as a redemption and a new purchase.
If you already have investments in a Regular plan, there is no need to stay there. You can execute a “Switch.” This orders the AMC to sell your units in the Regular scheme and the cash to purchase units in the Direct scheme of the same scheme.
But be aware of the implications:
- Exit Load: This is a fee that the fund may impose on the investor if they switch investments before the minimum holding period (typically 1 year for equity funds).
- Taxation: a switch is a sale. In case your gains are positive, you can accumulate capital gains tax liability based on the duration of holding the original units.
To facilitate the process of switching further, see our mutual funds switching guide.
Costs, Exits, and Taxes
Direct plans will save commissions, but at the same time, you need to be aware of expense ratios, exit loads that may arise, as well as government taxes.
- Expense Ratio: This is the annual fee that the fund house charges to manage your investment. Direct plans are fewer in number than Regular plans.
- Exit Load: This is the fee paid in the event of an early exit (i.e., redemption or Switch). It is to deter early withdrawals. Never forget to review the scheme document for the specific period (for example, 1% in case of redemption within 365 days).
- Securities Transaction Tax (STT): This is a small tax imposed by the government on the value of equity-based mutual fund units sold.
- Capital Gains Tax: Typically, there are two types of gains: Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). Equity and non-equity funds are charged differently. A financial year is recommended to be assessed through a tax professional to get the current rates.
There are platforms, such as STARTRADER, that emphasize the importance of understanding transaction costs as a trader you investor to protect your bottom line.
For further information on the cost, consult authoritative sources, such as the Association of Mutual Funds in India (AMFI), to obtain industry-specific details.
Safety and Compliance Checklist
A safe way to invest is to ensure that the plan details are thoroughly checked and that the investment credentials are retained.
- Double-check the plan: Ensure that the application is straightforward about the Direct.
- Double-Check the Option: Ensure you selected Growth (unless you specifically need payouts).
- Read the Documents: Read the Scheme Information Document (SID) and Key Information Memorandum (KIM). Test the Riskometer to determine whether the risk level fits into your comfort zone.
- Keep Your Data Safe: Never give your folio number, PAN, or OTPs to anyone who claims to be a fund representative.
- Avoid unsolicited links: Only conduct business using official AMC portals or established platforms.
FAQs
Yes, absolutely. Mutual funds do not need a Demat account. The fund house holds your units in a digital folio, and you are provided with a Statement of Account (SoA) as evidence of ownership.
You can log in to the AMC website or the RTA platform. Click the Switch option, select the Source scheme (your Regular plan), and the Target option (the Direct plan of the same fund).
Under the Growth option, the profits would be reinvested to drive a rise in the unit price (NAV) over time. The IDCW option grants you profits periodically that decrease the NAV and leave you with a tax liability.
With most funds, you can invest a SIP of as little as 500 or 1000 per month. The minimum requirement for lump sum investments is usually 5,000 rupees.
Conclusion
One of the cost-effective methods of accumulating wealth in India is investing in direct mutual funds.
When you avoid distributor commissions, you ensure that more of your money is invested and will continue to grow over time.
The process is very transparent and fully digital, with control well in your hands. It is about discipline, which is the key to successful investing.
Keep your SIPs, check your portfolio periodically, and ensure your scheme selection aligns with your long-term financial objectives.
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