What are Direct Mutual Funds?

6 mins read
by Angel One

What is a Direct Mutual Fund?

An investor in a Direct Plan must invest directly with the AMC, with no intermediary to help with the transaction. As a result, since there is no distribution charge, the direct plan has a lower expenditure ratio.

What is the best way to invest in direct mutual fund plans?

Both direct and regular mutual fund options are available. This implies that while investing in a mutual fund scheme, an investor has two choices for where to begin. The majority of investors choose the direct plan, which allows anybody to participate in a mutual fund. A mutual fund scheme’s direct plans enable participants to invest in the scheme without the assistance of middlemen or distributors. Furthermore, the direct plan of a mutual fund scheme has various advantages over the normal plan.

Platforms for Investing in Direct Mutual Fund Plans

  • Asset Management Companies’ official webpages
  • Mutual fund registrars
  • SEBI-registered investment advisers’ online platforms

Documents Required for Direct Mutual Fund Investing

The following are the most important papers to have when investing in a direct mutual fund:

  • PAN Number
  • Aadhaar Number
  • Having a bank account
  • KYC (Know Your Customer) documentation

Investing in Direct Mutual Fund Plans

Anyone may invest in a mutual fund’s direct plan. Because direct subscriptions do not involve a broker or distributor, investors must handle all processing activities themselves, including KYC compliance, application submission, portfolio – consolidation, and nomination. This may be done both on and off the internet. However, using online platforms is the most convenient method to do it. The investors must go to the preferred fund house’s website and follow the steps one by one.

Mutual fund direct programmes are available to investors both physically and online. People who wish to subscribe to the direct plan of a mutual fund scheme may do so by going to the Mutual Fund Companies office or via their registrars. The following is a step-by-step technique for doing so:

– To begin, choose the mutual fund plan in which you wish to invest.

– To submit an application, go to the fund house’s closest branch.

– To subscribe to the direct plan of the preferred scheme, pay the sum levied by the fund house.

– Subscriptions are available online.

– Investors who do not want to deal with the difficulties of visiting a fund house may invest in direct plans over the internet. This may be accomplished by visiting the official website of the mutual fund business in which you want to invest.

KYC information

Individuals who are interested in participating in a mutual fund scheme must first complete their KYC. The process of updating your KYC is straightforward and may be completed in a few steps. Furthermore, this procedure only has to be completed once. The information may be used on a variety of platforms and mutual fund providers.

Both online and offline options are available for completing the procedure. Investors who want to update their KYC online should go to the KYC updation portals; those who want to update their KYC offline can go to the registrar or fund house.

Create a user account

After completing the KYC procedures in the next step, you must open an account with the mutual fund firm of your choice. You must first open an account with a mutual fund firm before you can register.

The information required on the online portal is the same as that required on a mutual fund application form. Alternatively, certain asset management firms may need you to complete a standard registration first, followed by a thorough registration when the transaction is completed. The procedure may vary from one fund house to the next.

Choose a scheme and a strategy

Once you’ve completed the registration procedure with the fund house of your choice, go to the ‘Investment’ area and choose the ‘Direct’ plan type. When you pick the Direct option, you will have the option of choosing between Growth and Dividend.

While the dividend choice will provide you with a consistent income, the growth option will gradually increase your wealth over time. Select any of the alternatives that correspond to your investing goal.

You will be prompted to validate the information after it has been submitted. If there are any errors or mistakes, double-check them. You may also be required to verify the submission of your form using an OTP sent to the email address or cell phone number you provided to the fund house. Some fund firms may be able to finish the verification procedure straight away. Following verification, you must complete the purchase using the payment method you selected before.

Features of Direct Funds

Direct mutual funds are gaining popularity with investors because they allow them to invest in the market directly. These are the key features of direct funds:

  • Investors can directly invest in the market without any intervention from an intermediary. 
  • Investors can invest in direct funds both online and offline.
  • There is no commission to be paid to the mutual fund company. The fund house will not impose any distribution fee and will keep the expense ratio low.
  • There is no transaction fee for direct funds.
  • With lower expense ratios and no intermediary commissions eating into returns, direct funds often provide higher returns than regular funds.
  • Direct funds tend to offer greater transparency in terms of costs and performance.
  • Investors can choose from various direct funds across asset classes, including equity, debt, hybrid, and thematic funds, allowing them to build a diversified and tailored investment portfolio.

Best Direct Funds

Fund Name Category  AUM ₹ crore 1-yr CAGR 5-yr CAGR Min lumpsum  
Quant Small-cap Fund Direct Plan Growth Small Cap Fund 8,075 34.06 30.74 5000
Quant Infrastructure Fund Direct Growth Sectoral Fund – Infrastructure 930 10.49 27.68 5,000
Quant Tax Plan Direct Growth Equity Linked Savings Scheme (ELSS) 4,433 11.08 26.85 500
Axis Small-cap fund Direct Growth Small Cap Fund 15,847 22.50 25.72 100
Quant Mid-cap Fund Direct Growth Mid Cap Fund 2,531  22.29 25.37 5000

**Funds are selected based on their 5-year CAGR as of September 21, 2023.

The best direct funds have the following characteristics:

  • Over the long term, the best direct funds have offered higher returns than regular funds.
  • These funds have lower expense ratios than regular funds, resulting in more funds being invested in the market to earn higher returns.
  • The inclusion of direct funds can help with portfolio diversification.
  • The fund managers of the best direct funds have an excellent track record.

 Advantages of Investing in Direct Funds

Investing in direct funds offers several advantages for investors compared to regular mutual. Here are five key benefits:

  1. Lower Expense Ratios: Direct funds have lower expense ratios since they do not involve payment of commissions or distribution fees to intermediaries. As a result, more of your investment capital is working for you, potentially leading to higher returns over time.
  2. Higher Returns: With lower expense ratios, direct funds often provide higher returns than regular mutual funds.
  3. Transparency: Direct funds offer greater transparency in terms of costs and performance. Investors can readily access information about their holdings, transaction history, and the fund’s portfolio composition, helping them make well-informed investment decisions.
  4. Customisation: Investing in direct funds allows investors to tailor their portfolios to their specific investment objectives and risk tolerance. You have greater control over your investment choices and asset allocation.
  5. Reduced Conflicts of Interest: Since there are no intermediaries, direct funds have fewer conflicts of interest. The investment decisions are based on the fund manager’s expertise and the fund’s stated objectives rather than incentives tied to selling specific products.

Disadvantages of Investing in Direct Funds

While investing in direct funds offers several advantages, it also comes with certain disadvantages that investors should consider:

  1. Lack of Advisory Services: Direct funds do not provide the services of financial advisors or intermediaries who can offer personalised investment guidance. Investors must rely on their knowledge and research, which may lead to suboptimal investment decisions, especially for those with limited experience.
  2. Higher Initial Research Requirement: Investing in direct funds necessitates a more hands-on approach. Investors need to conduct thorough research to select the right funds, monitor their performance, and make adjustments as needed. This can be time-consuming and may not suit individuals who prefer a more hands-off investment approach.
  3. Risk of Poor Asset Allocation: Without professional guidance, investors may make incorrect asset allocation decisions, leading to an imbalanced portfolio that does not align with their financial goals and risk tolerance. A suboptimal asset allocation can result in lower returns and increased risk.
  4. Limited Access to Expertise: Direct fund investors may not have access to the expertise of seasoned financial professionals and portfolio managers who manage regular mutual funds. This lack of expertise can impact investment decisions and asset selection.
  5. Behavioural Biases: When managing their investments directly, investors may be susceptible to emotional biases such as fear and greed. Emotional decision-making can lead to impulsive actions and poor investment choices, potentially resulting in financial losses.


Which is better, between direct and regular funds?

Direct funds mean that the investor is investing directly through the fund house without any intermediary or broker, which results in lower expenses and transaction fees. The returns earned are usually higher than regular funds. However, the decision to invest in a regular or direct fund should be guided by investment and financial goals and risk tolerance.

Who should invest in direct mutual funds?

Direct funds are more suitable for investors who are knowledgeable about the market and can make financial decisions without a distributor or agent.

Can I switch from regular mutual funds to direct mutual funds?

Yes, investors can switch from regular mutual funds to direct mutual funds within the same fund family. This process is known as “switching,” but it’s essential to consider exit loads, tax implications, and the specific rules of the fund house when making the switch.

Are direct funds safe?

Direct funds are regulated by SEBI. Most of the Fintech companies that offer platforms for direct mutual funds are registered with SEBI.

Are direct funds risky?

Direct funds themselves are inherently risky; their risk level is determined by the underlying assets they invest in, such as stocks or bonds. Because direct funds do not involve intermediaries, investors may face higher risks if they lack knowledge or experience in making investment decisions independently.