Why do Regular MFs exist? – #5 by sriramnpkt – Mutual Funds & ETFs – Trading Q&A by Zerodha

sriramnpkt Before delving into your questions, let me tell you a bit about the back story to appreciate the difference a little better.

A decade ago, there was no such distinction about regular/direct plans. Basically, all plans were regular, and the same expense ratio was charged to all fund investors. Most investors used to come through distributors (who used to do all the paperwork for investors), these distributors generally don’t charge the investor anything for their service, but get paid commission from the MF house. Very few investors used to go directly to the MF and investment office
MF Homes justifies that the higher expense ratio as part of the expense ratio was used by MF Homes to pay commission to these distributors.

When technology started to improve, a lot of finance houses created websites and other means through which you can invest in MF without any hassle. No need for paperwork. More and more tech-savvy people are taking this route and investing directly in MF. However, they were charged a high expense ratio (assuming the distributor account as well).

So finally SEBI came up with regulations that there was no need for a high expense ratio for an investor who was investing directly with MF (as there was no distributor involved). Therefore, the option must be provided for this investor to apply in a plan with a lower expense ratio without the distributor’s commission. Thus, around 2013 or 2014, it was necessary for every scheme to have two plans, direct and regular.

Thus those who have been investing through distributors can continue the way they were doing and pay higher expenses. Which is used to pay distributor commission (normal plan).
However, a direct investor can now invest in a low-cost fund (direct plan)

Hope that clarifies this concept. Now your questions.

In short, because zerodha can do it :smile:
Zerodha is a giant company that has a lot of other revenue sources, so they can offer free gifts in the form of a direct plan to their customers.
There is also a lot of competition here and most of the online brokers offer a straightforward plan, so zerodha needs to do that as well.

There is no difference regardless of the percentage of expenses. As I explained in the story, it is one scheme with two high options and low expenses

If the distributor sells a plan outright, they will not get any commission. While mammoths like zerodha can afford it, for smaller distributors (serving 100 customers) the MF commission is their only source of income. They can’t afford to sell a plan outright. A lot of banks are also big distributors of MF, and commission income is another great source of income.

If distributors sell a plan outright, how will they profit??

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