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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 deals with the asset management company (AMC), meaning there are no commission charges, and all the savings on fees go directly to the investor.
How a lower expense ratio can help you
Opting for mutual funds with a lower expense ratio is a simple yet impactful way to improve your investment returns.
The compounding effect of cost savings
Lower expenses leave more of your money invested in the market, allowing it to grow and compound over time. Over decades, this cost advantage can make a substantial difference in the size of your portfolio.
In short, a low expense ratio directly translates into higher net returns. Whether you're a beginner or a seasoned investor, prioritising cost-effective options like direct mutual funds is a smart move. You may not note the difference right now, but it will have a huge impact in the years ahead.
Suggested read: The power of compounding
Should new investors consider direct mutual funds?
If you're new to investing, you might wonder whether direct plans are the right choice. The answer depends on your willingness to take a hands-on approach.
Pros for new investors
- Cost savings: These plans allow you to avoid paying commissions to distributors, which boosts your returns over the long term.
- Transparency: You have direct access to information about the fund, making it easier to align your investments with your financial goals. However, if you bought funds through a distributor, you might end up investing in what they are pushing to earn higher commissions.
Potential challenges
- Research required: Investing directly requires a basic understanding of fund selection and financial planning. Beginners might find this process daunting without guidance.
- Lack of personalised advice: Unlike regular plans, direct funds don't come with distributor advice. However, there are plenty of online tools and resources to bridge this gap.
Practical advice
For new investors, starting with a small amount and gradually learning the ropes can be a practical approach. However, if you need a more personalised and guided strategy, Value Research Fund Advisor is an excellent companion. It offers curated fund recommendations and actionable advice tailored to your financial goals, making your investment journey simpler and more effective.
Suggested read: Are you a DIY investor?
How to invest in direct mutual funds
Getting started with direct plans is simpler than you might think. Here's a step-by-step guide to get you started:
Step 1: Complete your KYC process
A mutual fund KYC is done to verify an investor's identity and address to prevent any financial fraud or money laundering activities. It is a one-time activity and can be done for free. So, you don't need to redo the process every time you invest in a new fund.
To complete your KYC online, you can visit the following:
- The online KYC section of any fund house.
- The official website for CAMs and KFintech.
You need to provide your registered mobile number and Aadhaar number for OTP verification. The details are cross-referenced with your PAN Card for further confirmation. Lastly, your in-person verification is done via video call, where you have to show your original identity and address proof.
Step 2: Choose your investment platform
You can invest in these plans through:
- AMC websites: Most fund houses allow direct investments through their official websites.
- Online platforms: Several platforms like Groww, Zerodha, and Value Research Fund Advisor simplify the process of investing in direct mutual funds.
Step 3: Select your funds
Research funds based on your financial goals, risk tolerance, and investment horizon. Use tools to compare performance metrics like returns, expense ratios, and fund consistency.
Suggested read:
How to start investing in mutual funds online
How to choose a mutual fund
A platform that can help you invest smarter
These plans offer undeniable cost advantages, but to truly maximise your returns, it's crucial to choose the right funds. Value Research Fund Advisor can be your go-to tool for navigating the vast mutual fund market.
Why choose us?
- We offer a personalised portfolio that matches your investment needs and financial goals.
- Streamline this portfolio based on our expert advice. You can follow what is relevant to your strategy.
- Secure your family's future with our 6-in-1 account.
Take the first step
By leveraging Value Research Fund Advisor's tools and resources, you can gain the confidence to invest in direct plans and build a portfolio that aligns with you
Conclusion
Direct mutual funds are a smarter choice for investors who want to reduce costs and retain more of their returns. By eliminating distributor commissions, these plans lower the expense ratio, allowing your investments to grow efficiently over time.
Explore the benefits of direct mutual funds today, and with the right tools at your disposal, you'll be well on your way to achieving your financial goals.
Also read: Direct vs Regular mutual fund: Which one should you invest in?
This article was originally published on December 04, 2024.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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