What are mutual funds , in simple words to explain it with an example if someone wants to travel from Mumbai to goa via car there two ways he can go about it, one is he can drive his own car himself and the other one is he can higher some professional to drive him to goa from Mumbai, the professional will have a better idea and knowledge about the distance , the amount of petrol to be used , the road to take , etc. In same way in mutual funds we hire professionals to invest our money for higher returns . Mutual funds are a kind of financial vehicles made up of a pool of money collected from a various number of investors to invest in stocks , bonds, money markets and some other assets. The professional money managers operate the Mutual funds by allocating the funds assets in an attempt to obtain capital gains for the investors . The investors gain returns from dividends on stocks and interest on bonds held in the fund’s portfolio (portfolio is a grouping of various financial assets for example stocks ,bonds , commodities , etc), over the year the funds pay out approximately all of the income to the fund owners in the from of distribution, further giving the investors a choice to withdraw the distribution or reinvest the earnings. In case the fund sells securities which have increased in price , the fund has a capital gain and if holdings increase but aren’t sold by the money manager , the funds shares increase in price and one can sell the mutual funds share to earn a profit in the market.
How to invest in mutual funds?
When we go out for shopping , we always look out for discounts , offers etc to save costs but when it comes to investing , we turn out to be reluctant . Reason being lack of knowledge , fear of loss , etc. But with the rising awareness now people are exploring ways to invest less and earn more. The two basic plans for investing in Mutual funds are :
- Mutual Fund Regular plan- For example in a lookout for a rented accommodation, what we do is we approach a broker to show us the apartments / flats in the area. After the selection we pay an extra amount to the broker as brokerage for his time and effort , in a similar way in Regular plan in Mutual Funds we buy them from an advisor , broker or distributor. The Mutual fund company then pays commission to the intermediary / middlemen that is recovered as an expense from the plan.
- Mutual fund Direct plan: In this type of plan you directly invest in Mutual Funds without any advice or guidance from the middlemen that are the agents and advisors, you do your own research and invest . Direct Mutual funds plan was introduced by Securities and Exchange Board Of India (SEBI) in 2013 making it mandatory for all Mutual Fund companies to launch Direct Plans in all schemes. The transaction can be done by both online and offline methods i.e. by visiting the registrar’s or asset management company’s office for offline mode.
It benefits the investor over the regular plan as no commission is paid from the investment cost.
Why Direct Plan in Mutual Funds is a better investment option?
The strongest reason for people to invest in regular plans is the lack of awareness and inadequate investor education, hence they seek advice from the brokers to make all transactions. They ignore the small difference in the expense ratio in between the plans , which how ever makes a huge difference in a long run.
Bringing in account of numbers a Direct Plan in Mutual Funds saves about 0.06% of cost per year, which may not sound a huge amount currently , but for a long run the difference it brings is incomparable and cannot be ignored. Take for instance you invest Rs 10,000 per month through SIP in a Direct Plan of Mutual Funds for a span of 10 years , assuming the Mutual Funds generate 15% of returns annually , making you save 70,000 Rs. Similarly for those opting to invest a lump-sum amount can easily save Rs 2,50,000 over the period of 10 years. Both the plans i.e. the Regular Plan and Direct Plan for Mutual Funds have a very similar underlining portfolio, managers and even follow the same investment strategy but a lower expense ratio for Direct Plan for mutual funds say it merely about 1%, which you might feel is not a big digit but for investment for a period of long run the digit of 1% brings a huge difference the returns.
In the above chart if we assume that the Fund A generates 12% Compound Annual Growth Rate and after investing Rs 1,00,000 for 10 years in Direct plan its returns would be Rs 3,47,855 , which would be Rs 3,23,073 if invested in Regular plan. A good difference of +7.7% comes in the power of compounding. The Direct plans in Mutual funds gives us roughly 0.5% to 1.0% additional returns every year. In a near term the difference in returns may seem as small but for a long run the difference is worthy and cannot be ignored .
How to invest in Direct Plan for Mutual Funds:
ASSET MANAGEMENT COMPANY- Once the research is done and you have decided in which fund to invest all you have to do is visit the nearest AMC office or you can also visit its website to invest in that particular mutual fund. For Direct Plan in mutual funds investment you can even invest directly through the Asset Management Company online portal.
REGISTRAR AND TRANSFER AGENT (R&TA)- The Registrar also helps in online investment in Direct Plans for mutual funds, but the investment will be limited to the Mutual Funds listed with them.
MUTUAL FUNDS UTILITIES- It is a Mutual Fund transaction portal ; a single window provide to you to transact across all mutual fund schemes. MFU is a shared platform of different fund houses, firstly you need to create an account then you can transact in mutual funds of almost all the AMCs. By using a Common Transaction Form or via the online portal one can invest in multiple funds of different fund houses. There is no additional charge included for investment made through this portal.
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Should first time investors invest in Direct Plans for Mutual funds? Even if you are new to investing still you can invest in Direct Plans for Mutual Funds to meet your financial targets . In todays world everything is available at the tips of the fingers , with the help of internet you can search about mutual funds , do your research and when you have a fair knowledge about the fund schemes you can consider investing in Direct Plans while you are regularly monitoring the funds and rebalancing the portfolio whenever required , you don’t need a Mutual Fund distributor or advisor to do that for you. One can even seek guidance from Certified Financial Planner if they feel they are complete alien to Mutual Fund space to explore potential of wealth creation .