Understanding Direct Mutual Funds: A Comprehensive Guide

All you need to know about Direct Mutual Funds.
Direct Mutual Funds
4 mins
11 January 2024

There are many different types of Mutual funds available to invest in, including something known as direct mutual funds. Direct mutual funds offer lower costs, and a clearer path to reach your financial goals.

This article explains the ins and outs of direct funds and gives useful information to investors who want to make smart financial decisions.

What are Direct Mutual Funds?

Direct mutual funds or direct funds are a unique type of mutual fund investment where investors directly purchase units from the fund house without involving any intermediaries like distributors or brokers. In simple terms, it is like buying directly from the source. These funds bear the prefix 'direct' in their names.

The primary distinction lies in the absence of a commission or distributor fee, making direct mutual funds cost-effective compared to regular mutual funds. Investors can access these funds through the fund house's website or online platforms, allowing for greater transparency and control over their investments. This direct approach potentially leads to lower expenses and, subsequently, the opportunity for higher returns. Direct mutual funds are an attractive option for investors seeking a more cost-efficient and self-managed investment journey.

Features of Direct Funds

  • Lower expense ratio: Direct mutual funds have a lower expense ratio compared to regular mutual funds, as there are no distribution commissions involved.
  • No commission for distributors: Since direct funds are not sold through intermediaries, there is no need to pay commissions to distributors, making them cost-effective for investors.
  • Online and offline investment options: You have the option to invest in direct funds through both online and offline channels. You can conveniently purchase direct mutual funds online through various investment platforms and R&TAs (Registrar & Transfer Agents), providing ease of access and streamlined investment processes.

What are Regular Funds?

Regular mutual funds are investment vehicles that are distributed through intermediaries like agents, brokers, or financial advisors. In the regular mutual fund structure, investors rely on these intermediaries to facilitate transactions, provide advice, and manage paperwork. The expense ratio of regular mutual funds tend to be higher as it includes commissions and fees for the intermediaries involved. While this distribution channel offers convenience to investors who may prefer guidance, it also impacts returns, as a portion is allocated to compensate the intermediaries. Regular mutual funds may be suitable for investors seeking professional assistance in managing their investment portfolios, even though it comes at a higher cost compared to direct mutual funds.

Differences between a Regular Plan and Direct Plan in Mutual Funds

Feature

Regular Mutual Funds

Direct Mutual Funds

Distribution Channel

Sold through intermediaries like agents and brokers

Purchased directly from the asset management company

Expense Ratio

Higher expense ratio due to commissions for intermediaries

Lower expense ratio as no commissions are involved

Returns

Potentially lower returns after deducting expenses

Potentially higher returns due to lower expenses

NAV (Net Asset Value)

NAV may be slightly lower due to higher expenses

NAV tends to be higher as there are no distributor commissions

Investor Interaction

Investors may choose not have direct interaction with the fund house

Investors can directly communicate with the fund house

Transaction Convenience

Transactions can be done directly online or offline. May involve paperwork and intermediaries for transactions

Transactions can be done directly online or offline with the fund house

Mode of Investment

Often suitable for investors who prefer guidance and advice

Suitable for informed investors comfortable with self-research and decisions


Understanding the dynamics of direct mutual funds opens a gateway to a more cost-effective and transparent investment journey. Opting for direct plans empowers investors with lower expense ratios, potentially higher returns, and a streamlined investment process. By sidestepping intermediary commissions, investors gain financial advantages and maintain better control over their portfolios.

As the financial landscape evolves, embracing the simplicity and efficiency of direct mutual funds becomes a strategic move towards optimising investment outcomes. Choosing between regular and direct plans should align with individual preferences, financial goals, and the desire for greater financial control.

Frequently asked questions

Which are the best mutual funds to invest in India?

Determining the best mutual funds depends on individual financial goals, risk tolerance, and investment horizon. It is advisable to conduct proper research before investing in any mutual funds.

How to find the best performing mutual funds in India?

Investors can assess mutual fund performance through various platforms, including financial websites, AMC portals, and investment apps. Key metrics such as historical returns, expense ratios, and fund manager expertise can aid in evaluating performance.