Investing in mutual funds has become one of the most popular ways to grow wealth in India. With the increasing awareness about the benefits of mutual funds, more and more investors are shifting from traditional financial instruments like fixed deposits to mutual funds. Among the different types of mutual funds available, direct mutual funds have garnered significant attention due to their cost-effectiveness and potential for higher returns. This article will guide you through the process of investing in direct mutual funds in India, highlighting the benefits, steps involved, and key considerations.
What Are Direct Mutual Funds?
Direct mutual funds are schemes that investors purchase directly from the mutual fund house without the involvement of intermediaries or distributors. Unlike regular mutual funds, which come with a distributor commission, direct plans have a lower expense ratio since they do not include distribution fees. This lower expense ratio translates into higher returns for investors over the long term, making direct mutual funds an attractive investment option.
Benefits of Investing in Direct Mutual Funds
Lower Expense Ratio: The most significant advantage of investing in direct mutual funds is the lower expense ratio. Since there is no intermediary or distributor involved, the fund house does not have to pay any commission, reducing the overall cost of the investment. Over time, this reduction in expenses can lead to a significant difference in returns, especially for long-term investors.
Higher Returns: The lower expense ratio of direct mutual funds directly contributes to higher returns. While the difference in returns between direct and regular mutual funds may seem small initially, it can compound over time, resulting in substantially higher returns in the long run.
Transparency: Investing directly with the fund house increases transparency. Investors have full control over their investments and can track their portfolio, fund performance, and other details without any intermediary. This level of transparency empowers investors to make informed decisions.
Elimination of Mis-selling: Since there are no intermediaries involved, the risk of mis-selling is significantly reduced. Investors can choose funds based on their own research and understanding, aligning their investments with their financial goals and risk appetite.
Ease of Access: With the advancement of technology, investing in direct mutual funds has become easier than ever. Investors can invest directly through the fund house’s website or through various online platforms that offer direct mutual fund investments.
Steps to Invest in Direct Mutual Funds
Investing in direct mutual funds is a straightforward process that can be done either online or offline. Here’s a step-by-step guide on how to invest in direct mutual funds in India:
1. Understand Your Investment Goals and Risk Appetite
Before investing in direct mutual funds, it is crucial to have a clear understanding of your investment goals and risk appetite. Ask yourself the following questions:
- What is the purpose of your investment? (e.g., retirement, buying a house, children’s education)
- What is your investment horizon? (short-term, medium-term, or long-term)
- How much risk are you willing to take? (conservative, moderate, or aggressive)
Your answers to these questions will help you determine the type of mutual funds that align with your financial goals and risk profile. For instance, if you have a high-risk appetite and a long-term investment horizon, you might consider investing in equity mutual funds. On the other hand, if you are risk-averse and looking for stable returns, debt mutual funds or hybrid funds may be more suitable.
2. Complete the KYC Process
The next step in investing in direct mutual funds is to complete the Know Your Customer (KYC) process. KYC is a mandatory requirement for all mutual fund investors in India and involves providing your personal details, including identity proof, address proof, and a recent photograph.
You can complete the KYC process online through e-KYC or offline by submitting the required documents to the mutual fund house or a registered KYC Registration Agency (KRA). Here’s how you can complete the KYC process:
e-KYC: Visit the website of a KRA or a mutual fund house that offers e-KYC services. Provide your PAN card details, Aadhaar number, and mobile number linked to Aadhaar. You will receive an OTP on your registered mobile number for verification. Once verified, your KYC process will be completed, and you can start investing in mutual funds.
Offline KYC: Download the KYC form from the KRA or mutual fund house’s website. Fill in the required details and submit the form along with self-attested copies of your PAN card, address proof, and a passport-sized photograph to the mutual fund house or a KRA. Once your documents are verified, your KYC will be processed.
3. Choose the Right Mutual Fund Scheme
With your investment goals, risk appetite, and KYC process in place, the next step is to choose the right mutual fund scheme. Mutual funds in India are categorized into different types based on their asset allocation, investment objectives, and risk levels. Some of the common types of mutual funds include:
Equity Mutual Funds: These funds invest primarily in stocks and are suitable for investors with a high-risk appetite and a long-term investment horizon. Equity funds can be further classified into large-cap, mid-cap, small-cap, multi-cap, sectoral, and thematic funds.
Debt Mutual Funds: Debt funds invest in fixed-income securities such as bonds, debentures, and government securities. They are ideal for conservative investors looking for stable returns with lower risk. Debt funds include liquid funds, short-term funds, corporate bond funds, and gilt funds.
Hybrid Mutual Funds: Hybrid funds invest in a mix of equity and debt instruments, offering a balanced approach to risk and return. These funds are suitable for investors with a moderate risk appetite.
Index Funds: Index funds are passively managed funds that track a specific market index, such as the Nifty 50 or Sensex. These funds are ideal for investors looking for low-cost exposure to the stock market.
ELSS (Equity-Linked Savings Scheme): ELSS funds offer tax benefits under Section 80C of the Income Tax Act and invest primarily in equities. They come with a lock-in period of three years and are suitable for long-term investors looking to save taxes while growing their wealth.
Once you have identified the type of mutual fund that aligns with your financial goals, you can compare different schemes within that category based on factors such as historical performance, fund manager’s track record, expense ratio, and risk-adjusted returns. It’s essential to read the Scheme Information Document (SID) and Key Information Memorandum (KIM) of the fund before making your investment decision.
See Also: How Do You Recover Mutual Funds?
4. Choose the Investment Mode: Lump Sum or SIP
After selecting the mutual fund scheme, you need to decide on the mode of investment. Mutual fund investments can be made in two ways:
Lump Sum Investment: A lump sum investment involves investing a large amount of money in a mutual fund scheme at one go. This mode of investment is suitable for investors who have a substantial amount of capital available and are willing to invest it for the long term. Lump sum investments are more suited to market conditions where valuations are low.
Systematic Investment Plan (SIP): SIP is a disciplined way of investing in mutual funds where a fixed amount is invested periodically (monthly, quarterly, etc.) in a mutual fund scheme. SIPs help in averaging the purchase cost and mitigate the impact of market volatility. This mode of investment is ideal for salaried individuals or those who prefer to invest smaller amounts regularly.
Based on your financial situation, risk appetite, and market conditions, you can choose the investment mode that best suits your needs.
5. Register and Invest Through the Fund House’s Website
To invest in direct mutual funds, you can register directly with the mutual fund house of your choice. Follow these steps to register and invest:
Visit the Fund House’s Website: Go to the official website of the mutual fund house where you want to invest. Look for the option to invest in direct plans.
Create an Account: If you are a first-time investor with that fund house, you will need to create an account by providing your personal details, PAN number, and bank account information. You will also need to create a login ID and password for future transactions.
Complete the KYC Process: If you have not already completed the KYC process, you will need to do so at this stage. Some fund houses offer the e-KYC process as part of the registration process.
Select the Fund and Investment Mode: Once your account is set up, you can select the mutual fund scheme you want to invest in and choose between lump sum or SIP mode. Enter the amount you wish to invest.
Make the Payment: You can make the payment through various online modes such as net banking, UPI, or debit card. Once the payment is successful, you will receive a confirmation of your investment.
6. Invest Through Online Platforms
Apart from investing directly through the fund house’s website, there are several online platforms that facilitate investment in direct mutual funds. These platforms provide a user-friendly interface, tools for fund comparison, and portfolio tracking. Some popular online platforms for investing in direct mutual funds include:
Groww: Groww is a popular platform that allows investors to invest in direct mutual funds with ease. It offers a wide range of mutual fund schemes, including equity, debt, and hybrid funds. The platform also provides tools for goal-based investing and portfolio tracking.
Coin by Zerodha: Coin is Zerodha’s mutual fund platform that offers direct mutual funds at zero commission. It provides a seamless investment experience with features like SIP, goal tracking, and portfolio analysis.
ET Money: ET Money is another platform that offers direct mutual fund investments. It provides personalized recommendations based on the investor’s risk profile and investment goals. The platform also offers tools for expense tracking and tax-saving investments.
Paytm Money: Paytm Money allows investors to invest in direct mutual funds with low-cost investment options. The platform offers SIP, goal-based investing, and portfolio tracking features.
These platforms make it easy for investors to compare different mutual funds, track their investments, and make informed decisions.
7. Monitor and Review Your Investments
Investing in direct mutual funds is not a one-time activity. It is essential to monitor and review your investments periodically to ensure that they are aligned with your financial goals. Here are some tips for effective monitoring:
Track Fund Performance: Regularly track the performance of your mutual funds by comparing them with their benchmark indices and peer funds. If a fund consistently underperforms, consider switching to a better-performing fund.
Rebalance Your Portfolio: Rebalancing involves adjusting your portfolio to maintain the desired asset allocation. If one asset class (e.g., equity) has grown significantly, it may dominate your portfolio, increasing your risk. Rebalancing helps in maintaining the risk-return profile of your portfolio.
Stay Informed: Keep yourself updated on market trends, economic developments, and changes in fund management. Being informed will help you make timely decisions regarding your investments.
Avoid Overtrading: While it is essential to monitor your investments, avoid the temptation to overtrade. Frequent buying and selling of mutual funds can erode your returns due to transaction costs and taxes. Stick to your investment plan and make changes only when necessary.
8. Tax Implications of Direct Mutual Funds
Understanding the tax implications of mutual fund investments is crucial for effective tax planning. Here’s how different types of mutual funds are taxed in India:
Equity Mutual Funds: For equity mutual funds, if you hold the investment for more than one year, the gains are considered long-term capital gains (LTCG) and are taxed at 10% without indexation if the gains exceed ₹1 lakh in a financial year. Short-term capital gains (STCG) are taxed at 15%.
Debt Mutual Funds: For debt mutual funds, long-term capital gains (holding period of more than three years) are taxed at 20% with indexation benefits. Short-term capital gains are added to your income and taxed as per your income tax slab.
ELSS Funds: ELSS funds offer tax benefits under Section 80C, allowing you to claim a deduction of up to ₹1.5 lakh from your taxable income. However, LTCG from ELSS funds is taxable at 10% if the gains exceed ₹1 lakh.
It is advisable to consult a tax advisor to understand the tax implications specific to your investments and to plan your taxes efficiently.
Conclusion
Investing in direct mutual funds in India offers numerous benefits, including lower costs, higher returns, and greater transparency. With the availability of online platforms and easy access to information, investing in direct mutual funds has become more accessible than ever before. However, it is essential to conduct thorough research, understand your financial goals, and choose the right mutual fund scheme that aligns with your risk appetite. By following the steps outlined in this article, you can embark on your journey of investing in direct mutual funds and work towards achieving your financial objectives.
Related topics: