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Direct Mutual Funds Explained (Meaning, Charges & Taxation)

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

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Direct Mutual Funds Explained (Meaning, Charges & Taxation)

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 Meaning

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 Vs Regular Mutual Funds

Direct Vs Regular Mutual Funds

Direct Funds and Regular Funds are both parts of the same mutual fund scheme with the same portfolio, investment objective, risks and fund manager, but in direct plans there are no commissions given to the broker or agent.

Direct Mutual Funds

Regular Mutual Funds

Distributor or agents doesn't get any commission from AMC.

Distributors or agents get upfront as well recurring trail commission from AMC.

No commission cost on the Mutual Funds earning.

Commission cost of yearly 0.05% to 2%.

Offer higher returns.

Offer lower returns as commission cost is included in expenses.

Customers can buy them from AMC directly or through intermediaries like brokers.

These funds are sold through intermediaries like brokers or agents.

You need to do your own research to select funds.

Distributors or agents assist you in choosing funds as per your goals and risk profile.

The advisor or wealth manager cannot be biased as he is not getting any commission.

The advisors are usually biased as they try to sell mutual funds where they get the highest commission.


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.


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.

 

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.

Direct Mutual Funds Taxation

Mutual Fund investments attract Capital Gain taxes. The taxation on direct mutual funds is the same as that of regular mutual funds. There's no difference in taxes levied on direct and regular mutual funds.

Mutual Funds Capital Gain Taxes are of 2 types (Short Term Capital Gains Tax (STCG) and Long Term Capital Gains Tax (LTCG) depending on the holding period and type of scheme.

Type of Scheme Parameter STCG LTCG

Equity Schemes

Holding Period

Up to 12 months

Over 12 months

Equity Schemes

Tax Rate

15%

10% (Exempted up to Rs 1 lakh)

Debt Schemes

Holding Period

Up to 36 months

Over 36 months

Debt Schemes

Tax Rate

As per IT slab

20% after indexation

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.

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Frequently Asked Questions

  1. 1. What are direct mutual fund plans?

    Direct mutual fund plans are funds that can be directly bought from AMC. Unlike in regular mutual funds, there are no distributors or intermediaries involved in direct mutual fund plans.

    'Direct Funds' and 'Regular Funds' are both parts of the same mutual fund scheme with the same portfolio, investment objective, risks and fund manager, but in direct plans, there are no commissions or brokerage. This helps direct funds deliver a higher return than regular funds.

    Direct funds are offered by stock brokers like Zerodha, and 5paisa. You can invest in direct mutual fund plans online and offline. Both SIP and lumpsum investment modes are available. All your mutual fund units will be credited to your demat account.

     

  2. 2. Why invest in direct mutual funds?

    There are many reasons to invest in direct mutual funds including:

    • No brokerage/commissions on funds
    • Higher returns than regular mutual funds
    • Easy to buy online as well as offline
    • Lumpsum & SIP investment modes available
    • Both NFOs and existing funds available
    • All fund categories like theme base, Tax saving, equity, debt and hybrid etc., are available.

    However, direct mutual fund platforms don't offer advice or recommendations to investors. Some stock brokers compulsorily require you to open a demat account with them to be able to invest.

     

  3. 3. How buy direct mutual fund?

    Direct mutual funds are offered by AMCs or stock brokers like Zerodha, and 5paisa. You can invest online as well as offline.

    Steps to Buy Direct Funds Online

    1. Open an account with the stock broker
    2. Complete your KYC if not already done
    3. Visit the company's platform
    4. Transfer funds from the bank account to the mutual fund account
    5. Choose the desired scheme
    6. Invest in a lump sum or SIP mode

    Steps to Buy Direct Fund Offline

    1. Download the mutual fund application form from the AMC or stock broker website
    2. Fill the form and attach a cheque.
    3. Submit it to the investor service centre/branch of the AMC or its registrar and transfer agent (RTA) like Computer Age Management Services (CAMS), and Karvy etc.

    Note: KYC (Know Your Customer) is a one-time process. You don't have to do it every time you invest in a new fund.

     

  4. 4. Can I buy direct mutual funds online?

    Yes, you can buy direct mutual funds online. Stock brokers like Zerodha, and 5paisa have dedicated online mutual fund platforms wherein you can invest in mutual funds in a few minutes.

    Steps To Buy Direct Mutual Funds online

    1. Visit the company's online mutual fund platform. For example, Zerodha has a Coin platform.
    2. Open an account and link your demat account with it.
    3. Transfer funds to your account
    4. Search for the desired fund and enter your order details like investment amount, investment type (SIP/lump sum) etc.
    5. Review and confirm

    Note: Some stock brokers like Zerodha may need you to compulsorily open a demat account with them to be able to invest in mutual funds.

     

  5. 5. Can I buy direct mutual fund through demat account?

    Yes, you can buy direct mutual fund through your demat account in 2 ways:

    1. Stock Broker

      If your stock broker offers direct mutual funds then activate the mutual fund segment in your trading account and invest in desired mutual funds. The mutual funds will be credited to your demat account.

      Stock brokers Zerodha and 5paisa offer direct mutual funds.

    2. AMC or Fund House

      If your stock broker doesn't offer direct mutual funds then you can invest through AMC's website. However, you should have a demat account to be able to invest through them.

     

  6. 6. Can I buy direct mutual fund through Zerodha?

    Yes, you can buy direct mutual funds through Zerodha. The company is the first stock broker to offer Direct Mutual Funds. It has a dedicated platform 'Zerodha Coin' for direct funds. The Coin platform is available free of charge to all Zerodha customers.

    Zerodha Coin offers funds from 40+ Asset Management Companies including Axis Mutual Fund, BNP Paribas, DSP and Edelweiss. Investors can invest in both lumpsum and SIP payment modes.

    Note: A demat account with Zerodha is mandatory to invest through Zerodha Coin.

     

  7. 7. How to buy direct mutual funds online in India?

    You can buy direct mutual funds online from stock brokers like Zerodha, and 5paisa or direct from mutual fund websites. You can invest in direct funds online as well as offline.

    Steps to Buy Direct Funds Online

    1. Open an account with the stock broker
    2. Complete your KYC if not already done
    3. Visit the company's platform
    4. Transfer funds from the bank account to the mutual fund account
    5. Choose the desired scheme
    6. Invest in a lump sum or SIP mode

    Note: KYC (Know Your Customer) is a one-time process. You don't have to do it every time you invest in a new fund.

     

  8. 8. How to track direct mutual funds?

    You can track your direct mutual funds in many ways including-

    • Stock Broker's Platform- If you're investing in direct funds through stock brokers Zerodha, and 5paisa then you can track your investments in the platform itself. However, you would only be able to track only those funds brought through the platform.
    • AMC Website- You can track your direct mutual fund investments on the AMC website. However, here you can only track your investments with the particular AMC and not all of your investments if you have invested in funds of 3-4 different AMCs.
    • 3rd party platforms- There are some 3rd party platforms like ET portfolio, Moneycontrol portfolio management etc., wherein you can track all your direct mutual funds. You need to open an account and enter all your investment information and it will show you the real-time performance of your investments.

     

  9. 9. How to redeem direct mutual funds?

    You can redeem your direct mutual funds online. You can redeem the full investments or a part of it as per your needs.

    Following steps will help you redeem your funds-

    • Login to your stock broker or AMC website
    • Go to your investment section
    • Click on the fund or scheme you want to redeem
    • On the order page, enter number of units to redeem
    • Review and confirm

    It takes 2 to 3 days for the funds to get credited in your bank account.

    Note: Some funds like ELSS, Tax saving schemes etc., have a lockin period before you can redeem them. Please check the redeem conditions before placing the redemption order.

     

  10. 10. What is regular and direct mutual funds?

    Regular Vs Direct Mutual Fund

    Regular mutual funds are offered through a distributor or agent. Here customers have to pay a commission.

    Direct mutual funds are funds that are offered directly by the mutual fund house. There is no involvement of an intermediary like a distributor and agent here. Customers don't have to pay brokerage or commission on it.

    Direct Mutual Funds

    Regular Mutual Funds

    No involvement of distributor or agents.

    Involvement of distributors & agents.

    No commission & brokerage charges.

    Commission is charged in the range of 0.05% to 1%.

    Offer higher returns.

    Offer lower returns.

    The buying process is short & fast as you buy directly from the fund house.

    The buying process is as long as it involves intermediaries.

    You need to do your own research to select funds.

    Distributors or agents offer you assistance in choosing funds as per your goals and risk profile.

    The investment objective, portfolio allocation and risks etc., remain the same of both the funds.

     

  11. 11. What are direct growth mutual funds?

    Direct growth mutual funds are those funds that invest in stocks of high growth potential companies to earn maximum returns. Such funds also have a higher risk potential.

    The investment objective of direct growth mutual funds is to identify stocks that have the potential to grow fast in the future. It is suitable for medium to high-risk profile investors who are ready to take risks for higher returns.

     

  12. 12. Can we buy direct mutual funds through ICICI Direct?

    No, ICICI Direct doesn't offer Direct Mutual Funds. It offers only regular mutual funds through its online and offline investment platforms.

    Unlike regular mutual funds which are sold through mutual fund agents like ICICI Direct, the Direct Mutual Funds are sold directly by AMC to the customers. The commission paid to the agents in the case of regular mutual funds is passed on to the customers in the case of direct mutual funds. The Direct MFs earn 1% to 2% additional yearly when compared with the Regular MF.

    Stock brokers like Zerodha and 5paisa offer direct mutual funds.

     

  13. 13. Can we buy direct mutual funds through HDFC Securities?

    No, HDFC Securities doesn't offer direct mutual funds. The company only offers regular mutual funds.

    Direct mutual funds are sold directly by AMC or fund houses. Regular mutual funds are sold through distributors and agents who in return get paid a commission of 1 to 2%. The commission paid by the AMC to the agent is charged to the customer indirectly through MF management fees.

    The commission paid every year becomes a substantial amount if you stay invested for a longer-term. In direct mutual funds, you save on this commission amount and get higher returns.

    Zerodha and 5paisa are 2 stock brokers who offer direct mutual funds.

     

  14. 14. Can I buy direct mutual funds from Sharekhan?

    No, Sharekhan does not offer Direct Mutual Funds. Direct Mutual Funds give additional returns to investors (around 1% yearly) as the Mutual Fund AMC doesn't have to pay commission to the agents like Sharekhan.

    Discount brokers Zerodha, and 5paisa offer direct mutual funds.

     

  15. 15. Can NRI buy direct mutual funds?

    Yes, NRIs can invest in direct mutual funds. They need to open an NRE or NRO bank account, an NRI demat account and pay for funds in Indian currency. The rest of the process for buying direct mutual funds for NRIs is the same as that of resident Indians.

    However, there are quite a few AMCs in India that do not accept applications from the US and Canada-based NRIs due to extra compliance owing to the Foreign Account Tax Compliance Act (FATCA). For example, NRIs aren't allowed to invest in mutual funds at Zerodha.

    So please check with the stockbroker before opening a Mutual Fund account.

     

  16. 16. Where to buy direct mutual funds?

    You can buy direct mutual funds from stock brokers like Zerodha and 5paisa. Some of the AMCs or fund houses also sell the plans directly to customers.

    You could invest in a Direct Mutual Fund Plan online on the website of the stock broker or the Mutual Funds Utility (MFU) portal. You can also buy direct mutual funds offline through a physical application form, and submit it to the investor service center/branch of the AMC or its registrar and transfer agent (RTA) like Computer Age Management Services (CAMS), and Karvy etc. RTAs register and maintain detailed records of the mutual fund investments of investors for the convenience of mutual fund houses.

     

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1 Comments

1. USHA SURESH THINGALYA  Feb 16, 2021 11:05 I Like It. | Report Abuse Reply
can I buy mutual fund through CAMS and KFintech and is it direct.