Your online mutual fund investment platform is not free! Be it a bank or an online distributor, why on Earth would someone offer you a robust platform for transaction convenience and consolidation for free?!
A little background before we dig in: It is raining Direct mutual fund portals! As people start discussing the fees these direct fund portals charge, more and more investors are going, “but my investment platform is free! Why should I consider these?”.
For regular readers and active members at Facebook group Asan Ideas for Wealth, the answer is obvious. This post is meant for those who do not understand the difference between regular mutual funds and direct mutual funds.
Portals that do not charge any fee directly from you, earn commissions from mutual fund companies by selling so-called ‘regular mutual funds’. This is also true of independent distributors. The commissions are large enough for many of these portals to absorb the online gateway transaction charges associated with each transaction. If you wish to learn about these gateway charges, you could consult: List of Payment Gateways in India
Online portals that offer regular mutual funds plans are not free because, although there is no fee for holding/using an account, once you make an investment, the mutual fund company takes a small chunk from your investment and gives it to the portal as loyalty commission.
The loyalty commission fluctuates with the NAV of the fund and is applicable for as long as you stay invested in that fund. Meaning, as your investments grow, so does the commission.
Although these portals do make their business model clear in their websites, many regular plan investors do not seem to understand how it works.
There is nothing ‘regular’ about regualr mutual funds, but they are called so because they are older. The newer option (already 3+ years old!) is referred to as the direct mutual fund plan.
In a direct plan, there is no loyalty commission involved. Meaning no small chunk is removed from your investment.
Until Dec. 2105, there were only two ways to buy direct mutual funds:
- Directly with the AMCs (no fees involved)
- Via MyCAMs for a few mutual funds (no fees involved)
Just this month, many more options became available
- MF Utility – Run my 25 mutual fund companies (no fees)
- Third-party portals: Invezta (live), BharosaClub (live), ORO Wealth (live), Unovest(launching shortly) and I learnt about one more in the works: upraise.in. Here is a comparison of such direct plan portals
Illustration: What you ‘pay’ for using a regular fund investment platform.
Take a fund like ICICI Focussed Blue Chip. As on Jan 4th 2016, a 3-year SIP in the regular plan of this fund would have given you ~ 13.4% return.
A similar investment in the direct plan of this fund would have given you 1% more because no commissions are taken out. For Franklin Indian Smaller Companies fund, this is about 2.2% more!
For a Rs. 5000 SIP in ICICI Focussed Blue Chip, the direct plan would have given a corpus which is ~ Rs. 3,300 more.
This is not a constant difference! The longer you stay invested, the larger it will become.
For example, the ICICI fund direct plan SIP corpus after 1Y was only 0.34% more than the regular plan counterpart.
This grew to 0.79% after 2Y and 1.47% after 3Y (~ Rs. 3,300 for a Rs. 5000 SIP).
This gap will only keep getting wider.
If you like some projections into the future, try this: Illustration: Direct Mutual Funds vs. Regular Mutual Funds
With many options now available to invest in direct plans from a single portal either for free (MF Utility, CAMs) or via the 3rd party portals mentioned above, it is only a matter of time before more and more existing investors switch to direct mutual fund plans.
Do participate in this simple poll and retweet it.
Do you know the difference between ‘regular mutual funds’ and ‘direct mutual funds’? Please retweet.
— freefincal (@FreeFinCal) January 28, 2016