Difference between Direct and Regular Mutual fund ::

First of all, we need to understand that there are 2 ways to invest in mutual funds.

Direct

Regular

In the regular mode, you invest in mutual fund with the help of a distributor. Hence, you need to pay a commission to the distributor. The catch here is you don’t need to pay upfront fees and might feel that it is free. However, the distributor commission is compensated by your investment amount and return. For example, if you invested Rs 1 lakh and got a return of 10% at the end of the year, then you should get Rs 1.1 lakh. However, around 1% of this would go to the distributor. This would be Rs 1,100. This would happen every year.

In the direct investment mode, you don’t need to pay any commission as there is no distributor. It means you get your entire Rs 1.1 lakh.

Now, what is the role of platforms like Zerodha, Groww, and direct platforms of AMC?

Their role to provide direct mutual funds to the investor so that the investor do not need to pay the commission to the distributor.

But there is a major difference between Zerodha, Groww and AMC.

AMC’s (Asset Management Company) have individual websites for direct investment. For example, if you need to invest in SBI mutual fund, you need to create an account on SBI mutual fund website. If you want to invest in HDFC mutual fund, you need to create an account with HDFC mutual fund website. Now, if tomorrow you want to invest in some other fund, you need to again create an account. Imagine the amount of pain with multiple username and passwords. Moreover, you can’t see the consolidated portfolio performance on a single screen.

That’s where Zerodha and Groww come into picture.

They enable the investors with a single platform to invest directly in multiple mutual fund houses without any commission.

But then how does these platforms earn?

This is a long term game. Companies like Zerodha and Groww are FinTech companies. It means they have integrated technology with finance. With technology integration, the cost of operations gets reduced. And the scale of operation becomes infinite.

Anyone can invest in Zerodha and Groww by sitting anywhere in the world just with the use of technology. Isn’t it great?

Now, the financial sector has a high entry barrier. It means normally investors do not switch between banks. Have you seen anyone keep switching bank accounts? No. It means once you get a good customer base, there are high chance that they will be with you. Once you acquire the customers and they stay for a long duration, you have the power to cross-sell the products. Yes, that’s the key.

Each FinTech company is trying to target as many customers as possible and build a solid client base. They know that once the client base is built, it would be easy to sell other stuff. The ultimate goal of each Fintech company would be to become a one-stop solution to each financial need.

Yes, tomorrow they might start stock service, insurance service, wealth management service, etc. In short, they need a customer base and then revenue would automatically flow.

Having said this, platforms like Zerodha and Groww are providing great value addition without any cost to the end customer.

From

Sahil Bhadviya

Quora