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5 Benefits of Investing in Direct Mutual Fund Plans

Updated: Feb 26

Direct mutual fund investments have gained significant popularity among investors in recent times. An investment plan known as a direct mutual fund is one that investors buy straight from the Asset Management Company (AMC). 


5 Benefits of Investing in Direct Mutual Fund Plans

Between investors and fund houses, there is no involvement from a distributor, agent, or third party. A distributor, agent, or other third party sells traditional mutual funds. 


If the salesperson is successful in finding investors, the AMC pays them a commission or brokerage. In this article, we'll delve into five key advantages of opting for direct mutual fund investments.


Investing in Direct Mutual Funds: What Is It?

Investing in a mutual fund, without the use of a broker, distributor, agent, or other middleman, is known as a direct mutual fund. Put differently, you can immediately buy the scheme units via the AMC's branch office or on their official website or direct plans are also available on aggregator platforms.


The popularity of direct mutual fund plans can be attributed to their inherent advantages, such as lower expenses, enhanced returns, unbiased decision-making, and portfolio flexibility. 


Investors increasingly prefer the transparency and autonomy offered by direct plans, as they provide a more efficient and personalized investment experience compared to regular plans.


Imagine you're considering an investment in the "ABC" equity scheme offered by a specific fund company. 


In this scenario, there are two investment alternatives: Direct and Regular plans. 


Regardless of whether you choose to invest through an intermediary or directly, both options lead to an investment in the same "ABC" plan. 


This means that the underlying investment remains consistent, and the choice between Direct and Regular plans primarily influences the structure of fees and the level of control you maintain over your investment.


Benefits of Investing in Direct Mutual Fund 

1. Lower Expense Ratios

One of the primary advantages of direct mutual fund plans is the absence of intermediary commissions. In regular mutual fund plans, distributors receive a commission for facilitating investments, which is embedded in the expense ratio. 


In contrast, direct plans eliminate this intermediary, resulting in significantly lower expense ratios. This means that a higher portion of your investment is working for you, potentially leading to higher returns over the long term.


2. Increased Returns

As direct funds don't require brokerage or commission, their expense ratio is expected to be lower than that of normal funds. When you invest with a long-term view, the difference in returns between the regular and direct funds may not seem substantial at first. However, it would be substantial.


While the difference in returns may seem marginal initially, the impact becomes more pronounced over the long term, making direct mutual fund investments an attractive option for investors.


3. No Intermediary Bias

When investors choose direct mutual fund plans, they take complete control of their investment decisions. This eliminates any potential bias or influence from intermediaries who may be motivated by commissions. 


Investors can directly analyze fund performance, compare various schemes, and make informed decisions based on their financial goals and risk tolerance. This autonomy empowers investors to tailor their portfolios to align with their unique objectives.


4. Ease of Switching and Portfolio Management

Investors in Direct mutual fund investments have the flexibility to switch between schemes or asset classes without incurring additional commissions. 


This agility in portfolio management allows investors to adapt to changing market conditions or adjust their investment strategy as their financial goals evolve. 


5. Higher NAV

A mutual fund's Net Asset Value (NAV) is calculated by dividing its total asset value by the number of units that are still in circulation. NAV is equal to (owner asset value) / (outstanding units). 


A mutual fund's assets can include cash instruments, bonds, and treasury bills, as well as equity shares of different corporations. The net asset value (NAV) of direct funds would be greater than that of normal funds because there are no brokerage fees for investors.


Conclusion

Direct mutual fund investments present a powerful option for investors looking to maximize their returns while maintaining greater control over their portfolios. 


It makes sense to invest in direct funds after learning the benefits over regular funds. By cutting back on pointless commissions, you can maintain a reduced expenditure ratio. Additionally, the returns on direct funds would be larger than those on normal funds.


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