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Direct Mutual Fund – Mutual Fund Direct Plan Meaning, Benefits & Risks

Want to know how direct mutual funds work? Read this article to know about direct mutual funds and how it is different from regular funds.
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There are two types of investors. First, who do their own research and accordingly make an investment decision on their own. Second, who takes the assistance of a financial advisor and accordingly makes an investment decision based on recommendation. Mutual fund houses cater to both types of investors through direct and regular plans. This article will discuss direct mutual funds, meaning, benefits & risks.

What is a direct mutual fund and its features?

When an investor approaches the fund house directly (online or offline) to invest in a particular scheme, it is known as a direct fund. There is no intermediary like a mutual fund distributor or broker involved in a direct fund. Hence, there is no commission required to be paid. Due to this, the expense ratio of a direct mutual fund is lower than a regular fund. 

A direct fund's net asset value (NAV) is always higher than a regular fund. The returns of a direct fund are always higher than a regular fund.

Returns of best direct funds

Mutual fund houses provide a direct and regular investment option for every scheme across equity, debt, and hybrid categories. It will not be possible to publish returns of the best direct funds in each category. Hence, we will take an example of large-cap equity funds to look at the returns of the best direct funds in this category.

Returns of best large-cap funds (direct)

Scheme nameAUM (Rs. crores)1-year3-years5-years
Axis Bluechip Fund33,51823.58%22.75%22.27%
Canara Robeco Bluechip Equity Fund5,69026.86%24.14%21.00%
Mirae Asset Large Cap Fund29,96029.05%20.49%19.07%
BNP Paribas Large Cap Fund1,24523.86%21.27%18.91%
Edelweiss Large Cap Fund31125.27%20.69%18.61%

(Source: https://www.moneycontrol.com/mutual-funds/performance-tracker/returns/large-cap-fund.html)

Note: The returns are as of 10th Jan 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year performance.

What are regular funds?

When an investor invests in a mutual fund scheme through an intermediary like a mutual fund distributor or broker to whom a commission is paid, it is known as a regular fund. As there is a commission paid to the intermediary, the expense ratio of a regular mutual fund is higher than a direct fund.

A regular fund's net asset value (NAV) is always lower than a direct fund. The returns of a regular fund are always lower than a direct fund.

Difference between direct and regular plans

Some of the differences between a direct and regular plan include:

FeatureRegular planDirect plan
Involvement of intermediaryAn intermediary like a mutual fund distributor or broker is involved.No intermediary is involved.
CommissionThe commission is paid to an intermediaryNo commission is paid to an intermediary
Expense ratioThe expense ratio is higher than the direct planThe expense ratio is lower than the regular plan
Net asset value (NAV)Scheme NAV is lower than the direct planScheme NAV is higher than the regular plan
ReturnsReturns are lower than the direct planReturns are higher than the regular plan

How to choose between direct plans and regular plans?

Whether you should choose a direct plan or seek advice from a financial advisor depends on the following:

  1. Knowledgeable investors: If you are a knowledgeable investor and have time to research the appropriate mutual fund schemes for investment, you may choose to go for direct plans. You will also need to review your investment portfolio regularly, once every six to twelve months.
  2. Beginners: If you are a beginner in the world of mutual funds or have some knowledge, but no time to research due to your profession, you should seek a financial advisor's help. A financial advisor can help you identify your financial goals, risk assessment, asset allocation, goal planning, selection of mutual fund schemes for investment, regular review, and handholding till you achieve your financial goals. 

How to invest in direct plans?

You can choose the Glide Invest platform to invest in direct plans of various mutual fund schemes. Glide Invest recommends only direct plans and not regular plans. While investing through the Glide Invest App, you will have to take the following steps:

  1. Specify your financial goal, for example, retirement planning
  2. The amount you wish to accumulate for the financial goal
  3. The number of years in which you have to achieve the financial goal
  4. The amount by which you will increase your SIP every year

The platform will recommend three investment portfolios based on the above inputs: aggressive, conservative, and balanced. Once you select an investment portfolio, you will see the direct plans of mutual fund schemes recommended for investment. The platform will recommend direct mutual fund investment based on asset allocation.

Taxation of direct plans

The taxation of direct plans is similar to that of regular plans. 

  1. Taxation of direct equity funds: If you sell your direct equity mutual fund units before 12 months, the capital gain will be classified as short-term capital gain (STCG). The STCG will be taxed at 15%. If you sell your direct equity mutual fund units after 12 months, the capital gain will be classified as long-term capital gain (LTCG). The LTCG of up to Rs. 1 lakh in a year will be exempt. The incremental LTCG above Rs. 1 lakh in a year will be taxed at 10% without indexation benefit.
  2. Taxation of direct debt funds: If you sell your direct debt mutual fund units before 36 months, the capital gain will be classified as short-term capital gain (STCG). The STCG will be added to your overall income and taxed based on your income slab. If you sell your direct debt mutual fund units after 36 months, the capital gain will be classified as long-term capital gain (LTCG). The LTCG will be taxed at 20% with indexation benefit or 10% without indexation benefit.

To start investing in direct mutual fund schemes as per your appropriate asset allocation, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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