What are direct mutual funds?

Mutual funds are the first place to start if you want to grow your wealth over time. But what if you could retain more of your returns? That's exactly where direct mutual funds help by reducing your investment-related costs. This article dives deep into what makes direct plans a smarter choice for long-term investors. After all, small expenses add up to a big sum over the passage of decades. From understanding the expense ratio to learning how to invest directly, you'll find everything you need to know to make informed decisions. What is an expense ratio? Before understanding the advantages of direct plans, it's essential to grasp the concept of the expense ratio. Understanding the expense ratio The expense ratio is the annual fee that a fund house charges investors to cover the costs of managing the fund. This fee is expressed as a percentage of the fund's total assets under management. It includes expenses such as fund management fees, operational costs, and administrative charges. For regular mutual funds, this fee also includes distributor commissions, which can hike up the expense ratio by 0.3 to 0.7 per cent. In some funds, this difference can be as much as 1 per cent. Why it matters Even a small difference in the expense ratio can significantly impact your long-term returns due to compounding. For example, let's assume you invest Rs 10 lakh in a fund growing at 12 per cent annually. A 0.5 per cent lower expense ratio could save you over Rs 8 lakh over 20 years. By reducing costs, you retain more of your returns - an advantage that's particularly important for long-term investors. Suggested read: How expense ratio eats into your mutual fund gains How do direct mutual funds work? These plans allow investors to invest in a fund without going through intermediaries like brokers or distributors. In a direct plan, the investor directly d

This article was originally published on December 04, 2024.