Direct Mutual Funds Explained (Meaning, Charges & Taxation)

Published on Monday, November 23, 2020 by Chittorgarh.com Team | Modified on Thursday, May 13, 2021

Direct mutual funds in India are fast gaining popularity because of the higher yield and ease of buying. Along with the fund house websites, they are made available by most online brokers like Zerodha, Upstox, 5paisa, ProStocks, Groww, etc.

Let’s understand the meaning of direct mutual funds and why direct funds better than regular mutual funds.

Direct Mutual Fund Meaning

Direct mutual funds are funds that are offered directly by the fund AMC to the customers. In the case where intermediaries like brokers offer the direct MF to customers, the AMC doesn’t pay commission or incentives to the broker. The savings from this is passed on to the customers which result in better returns in comparison to the regular mutual funds.

As the broker or agent doesn’t get any commission from selling these funds, there is no reason for them to offer wrong advice, which is usually a practice in regular mutual funds where funds are sold where the agents get the highest commission.

There is no arrangement of incentives or commission between the AMC or the fund house and the intermediary who is selling these funds.

Asset Management Company (AMC) or Mutual Fund House is a company that invests pooled funds from clients into a variety of securities and assets.

Traditionally, mutual fund houses appoint distributors and agents who sell their various schemes to the customers. The distributors or agents, get a commission (an upfront commission as well as a trail commission every year till you are invested) in return for their services.

As there is no involvement of distributors & agents in direct mutual funds, there are no commissions paid and hence the expense ratio is less. All other charges are the same as that of regular funds. This is passed on to the customer and adds to his profits. So, direct mutual fund investment in the same scheme will offer you more return than that in a regular fund.

The mutual fund schemes you invest in direct or regular funds are the same, only the buying process changes. There is no change in Scheme features like investment objective, asset allocation pattern, investment strategy, risk factors, and terms & conditions etc.

Many online stock brokers like Zerodha, 5paisa etc., offer direct mutual funds to their customers. You can also buy them directly through AMC’s official website.

Direct Mutual Fund Explained

• Customer can buy them directly from the AMC or fund house.
• Customer can also buy them through some brokers (distributor) but they do not get any commission from AMC.
• As distributors/agents have no financial benefits, they usually don’t give wrong advice (or push sales for higher commission).
• Customer earn higher returns as fund expense are less.
• Lumpsum & SIP mode of investment available.
• Both new and existing funds available.
• All fund categories like theme base, tax saving, equity, debt and hybrid etc., are available.
• These are the best options available to customers.

Direct Mutual Fund Platform

All AMC’s (fund houses) and some of the stock brokers offer direct mutual fund investment online.

These brokers have online mutual fund investment platforms (web and mobile app) wherein you can buy & manage your investments online. All you need to do is to open an account, transfer the funds and start investing.

Zerodha, the leading stock broker has an online mutual fund investment platform named Coin. The Coin is available in website as well as mobile app format.

All mutual fund units are held in the demat account linked to your mutual fund account.

Regular Mutual Funds

A regular mutual fund is one that is offered by a distributor (broker or agents) who receives a commission from the AMC for selling these funds to the customer.

In these funds, the mutual fund house pays a commission (upfront as well as a recurring trail commission every year) to the distributors or agents. The commission, ranging between 0.05 – 2%, is paid from fund management fees charged from you by the company. And therefore, it lowers your profits from the investments.

Direct Mutual Funds Earning Calculator

You plan to invest Rs 10,000 per month in a SIP for 30 years. For our calculations, let’s assume that you are charged a 1% commission in regular funds. Now let’s see the difference in returns in direct and regular funds:

Fund Type	Direct Funds	Regular Funds
SIP Investment/Month	Rs 10,000	Rs 10,000
Commission Paid to Agent	0%	1%
Expected Rate of Return (p.a.)	15%	14%
Investment Period	30 years	30 years
Future value of your investment	Rs 6.92 crore (+21%)	Rs 5.49 crore

You could earn Rs 1.43 crore (21%) more if you invest in direct mutual funds.

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Direct Mutual Funds Advantages & Disadvantages

Direct mutual fund investments have their own pros and cons including:

Advantages	Disadvantages
Save on commissions or brokerage and earn relatively higher returns.	No professional assistance in choosing funds.
Buy instantly online from the mutual fund house or broker.
No chance of misleading by distributors or agents.

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Direct Mutual Fund Investment

You can invest in direct mutual funds from stocks broker like Zerodha, 5paisa etc. or through fund houses. To invest in direct mutual funds using any of the platforms, you would need:

1. Mutual Fund Account

   You need to open an online account with the company offering direct mutual funds. The account opening, in most cases, is similar to signing up or registering on a website wherein you have to give your personal details like name, email, and mobile etc.

2. Demat Account

   You would compulsorily need a demat account to invest in direct mutual funds. The demat will be linked to your mutual fund account and mutual fund units bought will be held in this account electronically. You can hold other securities like stocks, IPO shares etc., in this demat account. In case, you don’t have a demat account, you can check with the company if they provide demat account services. You can open a demat account with most stock brokers.

Direct Mutual Fund Charges

Investment in a direct mutual fund is subject to a few charges and taxes. The charges vary from broker to broker. The taxes are fees are the same for regular and direct mutual funds.

Few common charges associated with online mutual funds investment are as below:

• Account opening fees

  This is the fee charged by stock brokers while opening the account. Zerodha charge Rs 200 account opening fee.

• Demat AMC

  A demat account is mandatory to invest in mutual funds online. Most brokers charge Demat Annual Maintenance Charges (AMC). Zerodha charges Rs 300 per year AMC for the demat account.

• Transaction Fees

  The broker may charge you a fee on every transaction (buy or redemption) made on the platform. Most online brokers (like Zerodha) charge zero transaction fees. Brokers like 5paisa charge flat Rs 10 per executed order.

• Demat Sell Transaction Charge

  The broker may charge a Demat Debit Transaction fee (or redemption fee). Zerodha used to charge Rs 5.5 per mutual fund redemption which it has waived in 2019. Read Demat Account Fees & Charges Explained for more detail.

Direct Mutual Funds For NRI

NRIs are allowed to invest in direct mutual funds. Here are rules for NRIs investments in Direct Mutual Funds:

1. Open an NRE or NRO bank account in India. In NRE Bank Account, funds, principal and interest amount is freely repatriable whereas, in the case of the NRO Bank Account, only principal up to $1M in a financial year is repatriable after completing certain formalities with RBI.
2. NRI Mutual funds investment in India is regulated under FEMA. NRIs based in the US have to comply with the FATCA As per this act, every company accepting investments from US citizens must inform the US authorities about the investments.
3. NRI needs to invest in Indian currency (INR) as Mutual Fund companies in India are only allowed to accept investments in Indian currency.
4. NRIs can invest directly or through a Power of Attorney (PoA) PoA is a document that legally authorizes a person to act on behalf of another as per the conditions set in the document. To invest in a mutual fund through a PoA, both the NRI investor and his PoA needs to complete their KYC. The PoA can buy/sell on behalf of NRI. A PoA holder could be an Indian Resident.

Note: Not all AMC or brokers may allow NRI to invest in Mutual Funds due to additional Compliance related to FATCA regulations.

Direct Mutual Fund Investment Process

The process to invest in direct mutual funds is easy.

Steps to invest in direct mutual funds

1. Open a demat account with a broker.
2. Open a Mutual Fund account with a broker or AMC.
3. Link the demat account with the mutual fund account.
4. Login to brokers or AMC’s Mutual Fund investment website or App.
5. Select mutual fund schemes as per your financial goals.
6. Invest in SIP or Lumpsum as per your choice.
7. Add funds to your Mutual Funds account.
8. Place the order.
9. The mutual fund units will be credited to your demat account once the order is processed.
10. You will be informed through SMS and email.

In addition to this, Securities Transaction Tax (STT) is applicable at the rate of 0.001% on equity-oriented mutual funds at the time of redemption.

Note: The tax rates are revised every year by the government.

List of Direct Mutual Fund Brokers in India

1. Direct Mutual Fund Zerodha

Zerodha is India’s largest direct mutual fund platform that offers funds through its Coin platform. The broker has partnered with 40 Asset Management Companies (AMCs). You can buy direct mutual funds online from the company’s platform at zero commission or brokerage. The company doesn’t charge any other fees. Moreover, in case you don’t have a demat account then you can open a demat account with the company.

Zerodha Coin Mutual Fund platform Key Features

• Invest, modify, and pause SIPs anytime with ease and without any hassle.
• Easy navigations through schemes and fund categories
• Track your holdings sector-wise or on the weights of underlying securities
• Invest in ELSS (Equity Linked Savings Schemes) funds to save taxes under section 80C
• Instant payments through UPI for mutual funds
• Provide eMandate for SIPs for automated fund transfer
• Hold your funds in Zerodha Demat Account

Read Zerodha Mutual Fund Review for more details.

2. Direct Mutual Fund 5paisa

5paisa is another popular online discount broker that offers direct mutual funds. The company charges no commissions, brokerage and fees on mutual funds. It offers a free demat account for life for mutual fund investors.

5Paisa Mutual fund platform Key Features:

• Invest, pause and modify mutual fund schemes easily without any hassles
• Navigate easily across different categories and schemes
• Choose the schemes based on investment needs
• Invest in mutual funds through SIPs
• Track your mutual fund investments online
• Calculate the estimated returns through the SIP calculator
• Invest either through mobile or browser-based trading platform
• Open a free demat account
• Integrated platform for mutual fund and stocks
• Offers customized smart investment plans

Read 5paisa Mutual Fund Review for more details.

Conclusion

Direct mutual funds offer higher earnings to investors. They are the best way to invest in Mutual Funds. You earn up to 2% yearly higher returns when investing in them when compare to regular mutual funds.

The investment advisor or wealth managers may not recommend these funds as it doesn’t offer any financial incentive to them. They may charge an extra fee from customers for this.