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Direct Mutual Funds - When Should You Choose Them Over Their Regular Counterparts?

What is a direct mutual fund? Should you choose these funds over your regular peers? A closer understanding of the two types is essential before deciding. 

Regular Mutual Funds 

You can use a mutual funds app to invest in these funds, and they are ones where you invest through any broker, intermediary, or distributor. The intermediaries will handhold the customer throughout the investment process and assist with documentation and transactions while offering advice. 

Direct Mutual Funds

These plans do not come with any assistance or support from intermediaries. In this case, you will buy mutual funds directly from the mutual fund house or AMC (asset management company). These plans often ensure higher returns owing to lower expense ratios than regular funds. However, investors with a solid understanding of various schemes and the market can only choose them since this is the only available guidance. 

Things to Consider When Switching to a Direct Mutual Fund

If you are thinking of switching to a direct mutual fund from regular options, then here are a few other things worth consideration: 

  • Lock-in periods- You can only change to a direct plan from a regular plan once the lock-in period expires. ELSS (equity-linked savings schemes) has lock-in periods of three years. You cannot switch before the conclusion of this period. Some other funds often have five-year lock-in periods. If you are investing via SIPs (systematic investment plans), then the lock-in period calculation takes place separately from every installment date. Every such investment should complete its lock-in period before you switch. 
  • Exit Load- Many schemes have penalties for investors withdrawing early, known as the exit load. It may be a percentage of the NAV (net asset value) that is subtracted during redemption. It is imposed if the investment is redeemed within a year from any equity fund. If you are investing in a regular mutual fund scheme through SIPs, then the exit load calculation is from the date of every monthly installment. 
  • Taxes- Switching to a direct mutual fund will mean redemption from the current plan and new investment in the new one. Hence, the redemption of regular mutual fund units will lead to capital gains taxes. The duration to be eligible for capital gains will begin once again from the investment date in the direct mutual fund scheme. Keep these aspects in mind to bypass unnecessary deductions by way of taxes. 

Why Should You Consider a Direct Mutual Fund

All said and done, direct plans may have several benefits for investors. Some of them include the following: 

  • These plans may offer higher returns than their regular counterparts since there are zero distribution costs and lower expense ratios. This seemingly nominal difference may add up to a sizable amount in the long haul due to compounding. 
  • These plans have a simpler process, where you directly purchase them from the mutual fund house or AMC. 
  • Mutual fund information relating to schemes, market movements, analysis, and other aspects is readily available online for investors. Hence, with some homework and knowledge, investors can skip the assistance part in regular fund schemes. 

Conclusion

Choose as per your knowledge, expertise, and time. You can earn higher returns with direct plans if you take risks without additional guidance. However, if you are a newbie without any idea of the market and mutual fund types, you can start with a regular mutual fund scheme.

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