Skip to main content

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.

Labels

Labels:

Comments

Post a Comment

Popular posts from this blog

3 Ways to Reduce Mutual Fund Investment Risks

Mutual funds are exposed to market risks; therefore, you should assess your risk tolerance before investing in them. Risk tolerance is the extent of risk you want to take with your investments. Taking a higher risk can increase the chances of getting higher returns, especially over the long term. Although there's no guarantee, choose the kind of fund that suits your risk appetite. This is the first step towards reducing investment risks. Wish to know about some other ways too? Here are 3 additional tips to reduce the risk associated with your mutual fund investments. Diversify Your Portfolio Diversification is crucial for investments. To diversify your portfolio, you can invest in a mix of assets so that profits from one investment can offset losses from another. You can diversify your investments in these ways: Invest in weakly correlated asset classes: Invest in a combination of equities and debt funds. Debt funds are suitable for steady and fixed income at lower risk over a sho...
Post a Comment
Read more

How to Start Building Wealth with Mutual Funds

 Newcomers to mutual fund investments often ponder about the ideal timing to enter the market. However, the truth is that there is no specific "good" or "bad" time when it comes to mutual fund investments. If your goal is long-term wealth creation through mutual funds, you need not be overly concerned about market conditions at the time of entry. This is because, despite short-term market volatility, mutual funds have historically performed well over the long run, providing investors with capital appreciation. In this article, we'll dive into the world of mutual funds and explore how they can help you start your wealth-building journey.  What are Mutual Funds? Before we jump into the nitty-gritty, let's begin by understanding what mutual funds are. To put it simply, a mutual fund is a collection of money from various investors that is then used to invest in a varied portfolio consisting of stocks, bonds, and other securities. This allows individual investor...
Post a Comment
Read more

Flexi Cap Funds: How do they work?

Flexi Cap funds invest at least 65% of their scheme assets in equity and equity-linked instruments. The interesting part is that Flexi Cap Funds invest in stocks across market capitalization.  Before you think of choosing the best Flexi Cap fund, here are a few points that you should keep in mind:  Flexi Cap Funds help you diversify your portfolio across Large, Mid and Small cap stocks.   Fund managers may select the allocation of funds and switch across varying sectors and companies, based on their view.  If a fund manager believes that a specific sector/market cap/stock is no longer attractive, then he/she can rejig the portfolio to any other sector/market cap/stock that has potential.  You should have an investment time horizon of at least more than three years while investing in Flexi Cap Funds.  Your gains from Flexi Cap Funds will be taxed just like other equity oriented funds . Short term capital gains arising from investments redeemed before o...
Post a Comment
Read more