Invest in the regular fund, it’s safe. Invest in the direct mutual funds scheme , it gives you more return, etc. You feel like too much advice is thrown at you. It’s too confusing right! Let us clear it in this article. You will be learning why people invested in the regular plan? Why direct funds were introduced & benefits it offers.
Before 2013 If you want to invest in a mutual fund, you need to approach a mutual fund distributor who has the right to sell mutual funds. These brokers are licensed by the Association of mutual funds in India(AMFI). They are identified by their unique ID & registered number which is affixed to mutual fund applications in the process of buying.
The paperwork & documentation work to buy a mutual fund can be grueling. Here comes distributor the savior! He takes care of all the paperwork & helps you in identifying the selection of funds, briefs you on the objective of the fund, portfolio distribution, etc. He won’t charge you a penny for all his hard work.
But the fund house pays about 1% commission to the broker. Does the fund house pay from their own pocket? That’s not happening in your dreams too. The fund house pays that 1% percent brokerage from your pocket. Oh, Ghosh!
Read more about: Why mutual fund is great for new investors?
Example: If you are investing 100rs in a fund, 98rs will be invested. How? 1 rupee will be charged as expense ratio(we saw that earlier), 1 rupee will be charged as commission to pay brokerage. The expense ratio is default, nothing can be done about it. The good news is, you can evade the brokerage.
Before 2013, All are investing in regular plans. Then SEBI made a mandate where mutual fund houses should have a direct scheme, where investors can buy funds directly from the fund house. So there is no intermediate, no brokerage.
All hassles to save one percent, Assume if you are investing 10000 INR in a year & fund charges one percent brokerage fee:
Year 1: Invested amount – 10000, Brokerage – 100
Year 2: Invested amount – 20000, Brokerage – 200 (not 100)
Year 3: Invested amount – 30000, Brokerage – 300
Year 4: Invested amount – 40000, Brokerage – 400
It goes on…..
Year 25: Invested amount – 250000, brokerage – 2500
In the 25th Year,10000 is invested, but brokerage is 2500. That’s 25 percent of 10000 (your capital). Imagine all this money is invested in the fund, the returns would be significant on higher-end than regular fund return.
To maximize the return for investors, SEBI mandated the fund house to have a direct scheme. So it encourages investors to participate in equity instruments in India.
In the case of direct funds, the only expense is expense ratio & exit load.
Exit load – It will become nil if you stay invested for more than 12 months.
If you want to buy a direct scheme, you can go to the website fund house and invest with them. Ideally, investors are spreading their investment bets on 3 or 4 different fund houses. Login to different houses to invest in is tedious.
Another option, you can invest in mutual fund platforms like the coin app (Zerodha) which is a zero commission fund platform. In this app, You can view funds’ past performance & compare different fund returns, expense ratios, Fund manager name, etc.
I am using Zerodha coin for my mutual fund investment. It’s very easy and convenient to use on various platforms like mobiles, laptops, PC, etc.
If you don’t have an account with Zerodha, I have given you the link which you can use to open your account.
Disclaimer: I am a personal user of Zerodha brokerage.