Mutual Fund investment can be done in two ways- through Direct Plan or Regular Plan.
Regular Plan - The regular plan is sold through agents, franchises, brokers and MF distributors. The commission that they earn by selling mutual funds is added to the expense ratio of the fund. From the top, it looks like that these middlemen are providing you a free MF account and all your investment is free but actually the amount of commission which they earn (0.5% - 1.25%) per year is adjusted from your NAV or net asset value of your mutual fund.
Now the expense ratio has 2 parts. One is the management expense which is present in both regular plans and direct plans. It is the expense borne by the mutual fund themselves to run the funds. For example, fund manager fees.
The second expense is the commission given to the distributors to distribute mutual funds which are only present in regular plans.
Now let's take an example: If you are an investor invested Rs 1000 in any fund, assume management expense is Rs 20 and AMC charges Rs 20 to keep the commission for his distribution network. So now the total expense ratio for such funds becomes 4% or Rs 40 for 1000.
Direct Plan - The name itself clarify that they are directly invested with AMC. So in such case, you will only have management expenses of Rs 20 which is a valid expense, but you save on Rs 20 which was a commission for partners/agents. In that case expense on your 1000 Rs is just Rs 20 which is 2%.
None of the distributors propose you direct plans. You get direct plans only from AMC. Zerodha is providing you with a platform to apply in mutual funds in the direct plans. By investing through Zerodha Coin platform, you can save on middleman commissions.Please refer to our detail article on Mutual Fund Investment with Zerodha. Direct mutual fund investment with Zerodha Coin For any questions and comments, please reply to this post.
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