The expense ratio in direct mutual funds is lower as compared to regular plans, and the investor gets higher returns. Here is all you need to know about investing in it
New Delhi: Mutual fund schemes are popular investment options that qualify for income tax deduction. A contribution up to Rs1.5 lakh a year qualifies for tax deduction under Section 80C and reduces your tax liability. In 2013, the Securities and Exchange Board of India (SEBI) asked all Asset Management Companies (AMCs) to give the option to investors of buying the units of every scheme directly.
Mutual fund schemes are of two types—regular mutual funds and direct mutual funds. Regular mutual fund schemes involve investing through a distributor, broker or an agent. They have a higher expense ratio because of commissions paid to agents every quarter. This commission comes out of your investments. On the other hand, direct mutual fund schemes are those where AMCs or mutual fund houses do not charge any distributor expenses or transaction fee and the commissions which were not paid to any broker are added to your investment balance. Due to this, the expense ratio is lower as compared to regular plans, and the investor gets higher returns.
Anyone can invest in a direct plan. As there is no distributor or broker involved, you have to take care of processing activity on your own that includes submission of the application, portfolio consolidation, nomination, and Know Your Customer (KYC) compliance issues.
You (investor) should have a Permanent Account Number (PAN), Aadhaar number and a bank account. KYC formalities should be completed. If these are not completed earlier, don’t worry, you have an option to complete your KYC through the Aadhaar number.
Does one need a demat account to buy direct mutual funds?
No, you don’t need a demat account to buy a direct mutual fund. They are needed to buy regular mutual funds as they are routed through distributors or brokers and the mutual fund house pays a commission to them for their services.
How to invest in direct mutual funds?
The easiest way of investing in direct mutual fund schemes is through online portals. You need to visit an AMC website and follow the given instructions. There are several platforms through which you can invest in direct mutual funds. However, some platforms are totally free of cost:
Can one switch from regular to direct mutual funds?
Yes, an existing investor in a regular plan can shift his investment to a direct plan, but it may cause tax implications in the form of short-term and long-term capital gains. The transition can be done directly through the AMC portal. The online form asks for the scheme name, folio number and holder details. It can also be done through CAMS, Karvy, MF Utility or through Sebi RIAs.
The request for change must be submitted at least 15 days prior to the next instalment. The AMC can take 21 to 30 working days to process the request.
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