Direct mutual funds allow you to purchase mutual fund units directly from the Asset Management Company (AMC) or fund house, eliminating the need for intermediaries such as distributors. This direct approach saves you money by bypassing commissions and fees associated with traditional mutual fund investing.
Think of buying an apple from your nearest supermarket. The supermarket acts as an intermediary connecting you with the farmer. If you bypass this middleman and buy apples directly from the farmer, you save the commission or markup that would otherwise go to the supermarket. Direct mutual funds work similarly.
What is an Asset Management Company (AMC)?
An Asset Management Company, also known as a fund house, is an organisation that invests pooled funds from various investors into financial instruments like stocks, bonds, and government securities. These pooled investments are called mutual funds. Examples of AMCs include DSP Mutual Fund, SBI Mutual Fund, and Nippon India Mutual Fund. India currently has about 44 Asset Management Companies.
Who is a distributor?
A mutual fund distributor is a person or organisation that facilitates mutual fund transactions between you and the AMC. Distributors earn income through commissions paid by AMCs, which are deducted from your invested amount.
How the cost difference works
Regular funds (through distributor): When you invest ₹1,000 in a fund through a distributor, the AMC deducts ₹10 and transfers it to the distributor, reducing your actual investment to ₹990.
Direct funds (no distributor): When you purchase through direct mode, you eliminate distributor involvement and commission payments, so your full ₹1,000 gets invested, resulting in higher returns compared to regular funds.
This cost difference affects your fund's Net Asset Value (NAV). Your fund's NAV is calculated after deducting the expense ratio. When you choose regular funds, you pay higher expense ratios due to distributor commissions, which results in lower NAVs. Direct funds have lower expense ratios, giving you higher NAVs and therefore better returns.