What exactly is a mutual fund?

Mutual fund is an investment option which revolves around pooling in money from different investors.

The assigned fund manager then buys stocks, bonds, and shares of other companies on behalf of the investors with the accumulated money.

It is a wise choice for those who do not harbor enough knowledge about the market and have no idea when it comes to where to invest.

The very basis of investment is risk, but risk gets minimized with the help of experienced and informed fund managers, who take the responsibility to plough money into places where the investor can reap more than he/she sows.

In this article, we will answer the 5 most important questions about direct mutual funds.

Understanding mutual funds

You bought 1 share of Airtel for ₹1,000.

Friend ‘A’ bought 1 share of Bajaj for ₹1,000.

Friend ‘B’ bought 1 Share of Colgate for ₹1,000.

Assume that at the end of the year,

Airtel has grown by 15%, Bajaj has grown by 20% and Colgate by 17%

Friend A’s investment would get more than ₹1,150.

Friend B’s investment would get a little boosted, but you unfortunately would not make much profit compared to the ones mentioned above.

So, you are at a loss.

But the idea of mutual fund revolves around gathering money from the three of you, where you are entitled to 1/3rd of all the three companies, namely Airtel, Bajaj and Colgate.

Hence, all three of you would enjoy a return of 17.33%

Direct mutual fund – What exactly is it?

In direct mutual funds, the involvement of brokers and intermediaries is eliminated.

Confused?

Well, in a direct mutual fund, the investment plan is settled directly with the mutual fund company.

Units or shares are bought and sold based on the company’s Net Asset Value (NAV) which is determined by the market value.

The NAV is calculated, keeping in mind a fund’s stock, cash, bonds and the overall asset.

The NAV keeps fluctuating according to the assets’ changing market value.

Direct mutual funds – fewer units, better returns

A unit in a mutual fund is simply the share allotted to the investor based on his/her investment amount.

For example, if you go to the market to buy two pens which cost 10 rupees each, you give 20 rupees.Each unit is equivalent to each pen, which is allotted according to how much money you pay.

Each mutual fund company has its own Net Asset Value (NAV) based on which the price of the units (or shares) is set.In a regular plan, you may get more units for a given amount of money but you may not higher returns.

Why?

Because in regular plans, a middleman, also known as fund advisor or broker gets a hidden commission.It may seem like a small amount but it adds up to a lot over time.

The expense ratio i.e. management fees, administrative fees, operating costs, and all other asset-based costs charged in a direct plan is way lower, compared to a regular plan.

The savings that you make in a direct plan is added to your returns.

What is an expense ratio?

An expense ratio refers to the additional money that has to be paid for the services provided by the fund manager or mutual fund company, excluding the unit charges.

The lower the expense ratio, the better it is for investors.

In direct mutual funds, the investor gets less units, but higher returns. Because no extra money is charged for commissions, management, administration or operation.

One should invest in a direct plan because buying 2 big sized watermelons is better than buying 6 small sized watermelons. Simply because the quality and quantity is better.

Advantages of direct mutual funds

In a nutshell, these are the advantages of a direct mutual fund plan

1.Higher returns

2.No extra money for commissions

3.No hassle

4.Quality is preferred over quantity

5.Good for long –term capital appreciation

6.Consumes Less Time Compared To Regular Plan

How to invest in mutual funds?

Offline

1.Contact mutual fund agents

2.Go to banks or other distributors

3.Go to any AMC (Asset Management Company) office and get a form, fill it up, and submit it directly or via CAMS or Karvy (which are registrars of mutual funds)

Online

The mutual fund industry has grown exponentially since 2016.

There are various online mutual fund investment platforms, like Groww, through which you can buy and redeem mutual funds without any hassle.

In fact, Groww is a completely paperless medium of investing.

Platforms such as these have excellent customer success teams who will help you in your investment journey and you may contact them if you have any issues with regards to your investments.

Conclusion

Taking various aspects into consideration, the smart option would be to go direct.The investor gets to enjoy 100% benefit without having to pay hefty a commission to an intermediary.

Regular plans might seem easier or cheaper on the surface level, but direct plans are better for the long run.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww