Mutual funds are the strongest instruments for generating long-term capital. Mutual funds investors benefit twinly from diversification and competent management of their funds. In 2013 SEBI initiated reforms in the field of mutual funds. Through these reforms, institutional investors and not just companies or highly net worth individuals are gaining popularity through mutual funds schemes.
WHAT ARE DIRECT FUNDS?
Funds that are directly issued by the fund house or AMC are those mutual fund schemes. These funds are called by 'direct' the name of these funds. A third party, distributor or agent should not participate. The investors deal directly with the fund's AMC. Since a third party is not involved, fees or brokerage charges are not involved in such transactions. Therefore, the direct plans investment ratio is comparatively less than regular funds.
FEATURES OF DIRECT FUNDS
The main features of direct funds are as follows:
- Investors don't depend on a third party to make investments.
- You can invest in direct funds, both online and offline.
- As there is no commission to be paid, the fund house will not impose the distributor fee and hence, keeping the expense ratio on the lower side.
- Transaction charges are not levied.
- The word ‘direct’ denotes the direct funds.
BEST DIRECT FUND
The following characteristics will be the strongest direct mutual fund:
- Has offered good returns over a long period.
- Is often not affected much by the market fluctuations.
- The expense ratio is lower when compared to peer funds.
- Offers diversification of the portfolio.
- The fund manager has an excellent track record.
ADVANTAGES OF INVESTING IN DIRECT FUNDS
The following are the main advantages of direct fund investments:
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i.Low Expense Ratio:
Since no third party is involved between you and the AMC, the ratio of expenditures for such funds is comparatively smaller than the normal funds. The AMCs pay the agents a fee in standard MFs and recover it via the cost ratio.
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ii.Higher NAV:
The net asset value (NAV) of a mutual fund is determined by dividing the total asset value in the portfolio of the fund between the number of units that are outstanding. Since the NAV will be comparatively greater than that of standard funds since there are no brokerage charges.
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iii.High Returns:
Since there is no direct funds brokerage, the direct funds ratio is relatively smaller than standard funds. The profit differential between daily and direct finances can seem insignificant, but if you stay investing for the long term, it would be big.
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iv.No Conflict of Interest:
You reduce the possibility of being deceived by a third party by directly communicating with the fund house. You can invest in some mutual funds plans for your interest through an agent or distributor. The option to invest in direct funds would also eliminate the scenario of conflicts of interest.