How to Invest in Direct Mutual Funds

Mutual funds are investment avenues where the funds of many investors are combined and parked in a particular category of funds. These funds will be actively managed and analysed by expert fund managers so as to generate good returns on the investment. 

In general, Mutual Funds can be categorised mainly into two categories: Regular Mutual Funds and Direct Mutual Funds. The funds that are accessed through intermediaries like agents, brokers, and financial advisors are known as Regular Mutual funds. On the other hand, a mutual fund where the investors can directly invest their funds without any intervention of middlemen is known as Direct Mutual Fund.

In this article, we will be discussing more about how to invest in direct mutual funds, the step-by-step process, the benefits and risks of investing in direct mutual funds and many more.

What are Direct Mutual Funds?

Direct mutual funds are a type of mutual fund where the investments are routed directly to the fund house without any intermediary like mutual fund distributors or agents. The main advantage of these funds is that there are no commission and distribution fees associated with these funds.

Why Choose Direct Mutual Funds? 

Investing in Direct Mutual funds is a preferred choice by most of the investors who are looking out for higher returns at lower costs. These plans generally have low expense ratios as they are not involved with any distributors or agents that charge fees and commissions on one’s investments. The Direct investment plan provides transparency to the investors as they are directly invested with the AMC of the funds, this avoids the potential hidden costs associated with the fund's expenses and commissions.

How to Invest in Direct Mutual Funds Online

• Step 1: Open an account: You can download any mutual fund app from the Google Play Store/Apple Store, and open an account by completing the KYC process.

• Step 2: Check out the categories in the Explore Section: The Explore section offers various categories including small-cap, mid-cap, large-cap, and others. 

• Step3 : Analyse the mutual funds: Check and analyse the mutual funds in which you wish to invest.

• Step 4: Analyze fund performance: Compare different mutual funds available based on past performance, expense ratios, and fund managers. That way you'd know which fund you can pick that serves your purpose with robust returns and controlled costs.

• Step 5: Invest in a Mutual Fund of your choice: You can make investments as a lump sum, as well as through SIP. You can constantly monitor all the investments and adjust accordingly.

How to Choose the Right Direct Mutual Fund

As direct mutual funds do not involve any intermediaries, they have comparatively lesser expense ratios. However, we cannot choose a mutual fund solely based on its expense ratios. First, identify your financial goals whether they are short-term or long-term and match them with appropriate fund categories like equity, debt, or hybrid. 

Assess the fund's performance history, the fund manager's expertise, and how well the fund aligns with your risk tolerance. Also, ensure you invest via a trusted platform for maximum cost efficiency.

Benefits of Investing in Direct Mutual Funds

• Lower Expense Ratio: The Direct Mutual Funds plan does not involve any intermediary between the investors and AMC which results in lower costs. This will reduce the overall expense ratio in the long run.

• Generate Higher Returns: As one is not paying any amount as commissions on mutual funds, these amounts are reinvested in the plan and generate returns and boost your wealth over the long term.

• Higher NAV: The Direct plans would generally have higher NAV’s because the costs incurred for these funds are low which will be deducted from their returns.

Challenges and Risks of Investing in Direct Mutual Funds

• Uncertain Returns: Since mutual funds are highly uncertain the returns that certain funds like equity and hybrid funds could generate cannot be determined and the investors who are planning to seek fixed returns won't be certain.

• No expert advice: As the funds are controlled and managed solely by the investors, there won't be any professional intervention to suggest or correct one’s investment decision. Hence, one’s investment may be prone to the risk of incurring losses.

• Emotional Biases: Since the market is always fluctuating with the prices going up and down, it is normal for early or novice investors to make biased investment decisions due to various emotional factors like fear of missing out, over-expectations etc. These can affect the overall returns of the investment.

Conclusion

In conclusion, Direct Mutual Funds offer investors the benefits of lower costs, higher returns, and more control over their investments, making them an attractive option for those willing to manage their own portfolios. However, they also come with risks, such as the need for thorough research and the absence of professional guidance, which can lead to emotional decisions or missed opportunities. Therefore, direct mutual funds are best suited for knowledgeable investors who are comfortable handling their financial strategies.