Let me answer in two parts
Do read this post. Let me give an example, assume you intend to invest in Birla sun life top 100 Fund - a SIP for Rs 10,000. The fund is available to be purchased in two plans - Regular or Direct. Check the image below from valueresearch
It is the exact same fund, same manager, same stocks, same everything. But check out the expense ratio of the two plans. Regular has 2.36% and direct has 1.06%.
What is an expense ratio?
Running a mutual fund is a business. Business has to earn. The way they earn is by charging the total AUM (asset under management) an expense. This expense is charged to the total AUM of the fund on a daily basis. So if today it is a Rs 1000 crore AUM fund, if expense ratio is 2%. Then 2% of 1000 crores divided by 365 (to calculate 1 day expense) or Rs 5lks is taken out from the total AUM by the AMC for running the fund today.
The expense ratio for regular funds is higher than direct because the AMC marks up the distributor commission also. The distributor has to earn for introducing the clients right? And yes he earns upfront and as well as trail every year as long as the person whom he introduced stays invested. Check this link on how much distributors earn.
Getting back to the Birla example, the expense ratio for regular is 2.36% and direct is 1.06%. What this means now is that if you had invested in direct plan 1.3% lesser would be reduced as expense from your investment. This 1.3% might seem small, but if you held your investments long term this will be humongous. If Birla top 100 gave 15% return for next twenty years, SIP of Rs 10000 in direct would be worth Rs 1.5 crores and regular would be 1.3 crores. Direct a whopping 20lks more because of the lower expense ratio.
But a point to be noted is, there are few distributors who bring in a lot of value on the table by advising right things to do. You can’t dismiss that just because you have to pay higher expense ratio. Direct makes sense if you know which mutual funds you want to buy and don’t need any advisory help.
Currently, the way to buy direct mutual funds is to visit the AMC/fund house website or office and directly invest. Different portfolios for different AMC’s, getting a common account number (CAN), cumbersome setting up SIP process, generally quite inconvenient. Hence coin.
- Coin offers investing in direct mutual funds (we earn 0 commission from your investment) with the convenience of being in demat. So single portfolio across stocks, MF ( over 31 AMC’s and 2000 funds), ETF’s, Bonds etc.
- Easy SIP, start stop whenever you want without any NACH requirement. Increase or decrease SIP values at will.
- NAV tracking orders. Similar to stocks, place orders to purchase or redeem funds based on NAV.
- MF in demat form and hence fungible. Extremely easy to pledge and take a loan against in case of emergency.
- Single capital gain statement, P&L, visualizations, and more.
- MF or stocks in demat are much easier to claim by dependents (nominee of demat) in the case of death. Direct plans with multiple AMC’s would mean multiple folios, difficult to aggregate and claim.
Phew, that was a long answer :),