- Their TER is a lot higher
- The returns are lower.
Why does the Govt & SEBI not ban Regular MFs considering people’s interest ?
I understand that the AMC gets a hefty commission & business from Regular MF. But at what cost ?
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Probably to increase their reach and distribution across smaller towns and villages where people tend to invest via agents, these set of investors cannot be brought to the market without regular MFs. Also mutual funds penetration in India is very low compared to other developed nations, there’s a huge growth prospect which cannot be met purely through direct MFs. So regular MFs are here to stay.
Also don’t be under the impression that direct MFs are truly direct, the term direct is just an eyewash, online portals which promote and sell direct MFs too get their cut from AMCs!
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Regular MF ideally exists for those peoples who are either illiterate or don’t have knowledge on market / MF. So the initiative for thus is to make people aware of their idle money to be invested & to keep track of their financial planning. So agents partners with various AMCs & people who invest with these agents get commission.
AMC & Agent both get commission, these depends on the schemes where people invest. For example - if investor invest in equity MF then agent gets around 1~2% commissions from MF /AMC for as long as long investor is investing their money in that scheme.
You can check these on AMFI website
AMCs do not get any commission. They actually pay commission out to distributors who got funds in. Hence higher TER.
Regular MFs are the one which funds distributors and effectively opens up MF world to all those investors who are not tech savy or are unable to invest directly with MF.
So regular MF are in people’s interest too.
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Thanks @Akash_Shah for the reply. I had few more questions in mind,
Zerodha is such a distributor right ?
Why has Zerodha stopped selling Regular MF then ?
The portfolio of the same MF in regular & direct plan is going to the same right, correct me if I am wrong. Other than the TER & returns, what else is the difference between them ?
I read this part of the argument in some article.
- I agree that an AMC is spending money to make MF reach people, kudos
- When the distributors are able to get in touch with such people, why don’t they popularize the direct plan ? Is it because of the fact that, the distributors will earn lesser commissions with direct plan ?
@sriramnpkt before going into your questions, let me tell you a bit of back story for you to appreciate the difference slightly better.
A decade back, there was no such distinction about regular/direct plans. Basically all plans were regular, and same expense ratio was charged to all fund investors. Most investor used to come through distributors (who used to do all paperwork for investors), this distributors generally do not charge anything to investor for their service, but get paid commission by MF house. Very few investors used to go directly to MF office and invest
MF houses justified high expense ratio as part of expense ratio was used by MF houses to pay commission to these distributors.
As technology started improving, lot of fund houses came up with websites and other means using which you can invest in MF hassle free. No paper work needed. More and more tech savvy people started taking that route and started investing directly in MF. However, they were still charged high expense ratio (assuming distributor expense too).
So finally SEBI came in with regulations that there was no need for high expense ratio for investor who were directly investing with MF (as there was no distributor involved). So option should be provided to such investor to apply in plan with lower expense ratio without distributor commission. Thus around 2013 or 2014, each scheme was required to have two plan, direct and regular plan.
Thus those who were investing through distributors can continue the way they were doing and pays higher expense. Which is used to pay distributor commission (regular plan).
However, direct investor can now invest in low expense fund (direct plan)
Hope this clears the concept. Now your questions.
In short, because zerodha can afford to do it 
Zerodha is a giant with lot of other revenue stream, so they can afford to give freebies in form of direct plan to its customers.
Also there is lot of competition here and most online brokers are offering direct plan, so zerodha needs to do it too.
No difference apart from expense ratio. As I explained in story, it is single scheme with two option high expense and low expense
If distributor sells direct plan, they get no commission. While mammoths like zerodha can afford it, for small distributors (who cater to couple of 100 customers) MF commission is their only source of income. They cannot afford to sell direct plan. Also lot of Banks are biggest distributors of MF, and commission income is one of the big source of other income.
Basically if distributors sell direct plan then how will they earn??
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