Zerodha co-founder Nithin Kamath has emphasized the importance of understanding the fundamental differences between 'direct' and 'regular' mutual fund plans, urging investors to review their portfolios to identify the type of plans they hold. According to reports from Business Standard, Kamath highlighted that a large number of people do not understand the difference between these two investment options, despite their significant impact on investment costs. The key difference lies in the inclusion of distributor commissions in regular plans, which results in higher expense ratios for investors over time. Direct mutual funds are a 'no-brainer' for DIY investors, as they eliminate distributor commissions that can reduce investor returns over time through compounding effects. While both direct and regular plans invest in the same portfolio and are managed by the same fund manager, the key distinction lies in the expenses charged to investors. Direct mutual fund plans do not include distributor commissions, have lower expense ratios, and can generate slightly higher returns over long investment periods due to lower annual costs, while regular mutual fund plans purchased through distributors, banks, brokers or financial advisers include distributor commissions within the expense ratio and usually have higher annual costs.
Bengaluru-based Groww, one of India's largest retail brokers by active users, has expanded its product mix to include regular mutual funds on its subscription-based Groww Prime platform. The product, initially launched for a select set of users earlier this year, has now been rolled out to the company's two-crore customer base. Groww had previously offered only direct mutual funds, claiming them to be a low-cost investment option that can generate better long-term returns by eliminating distributor commissions. However, Groww has now responded to the controversy, stating there has been 'confusion' and 'misinformation' about its mutual fund offering. The company clarified that MF Prime is not a shift away from direct mutual funds, but an additional product for a different set of investors who want research-backed guidance on investment decisions. Groww Prime provides mutual fund recommendations based on your risk profile, investment horizon, and financial goals, which is completely optional and meant for only those customers who need such recommendations. In response to the controversy, Groww issued a clear statement saying 'Direct mutual funds are, and will remain, the heart of Groww. Over 1 crore investors have built more than ₹1.9 lakh crore of mutual fund investments on our platform, making Groww the largest mutual fund platform in the country. For every DIY investor, Groww stays exactly what it has always been: direct, zero-commission, and free. Forever.'
In a post on X on 9 July, Kamath explained Zerodha's pricing strategy and its application to mutual funds. As reported by Business Standard, when Zerodha started India's discount brokerage model in 2010, it decided to charge the same fee regardless of trade size, arguing that the effort to execute a trade remains constant regardless of volume. This same logic shaped Zerodha's mutual fund business, leading the company to launch exclusively direct plans through its Coin platform. Kamath emphasized that a broker cannot call itself low-cost if it charges a percentage fee on transactions, as there's no incremental effort in executing larger orders. He said this principle has shaped Zerodha's product and pricing decisions from the beginning, with the company choosing to offer only direct mutual funds instead of charging commissions through regular plans. Kamath's recent remarks come after Groww expanded into regular mutual funds, with the Zerodha founder appearing to take a swipe at rival platforms, stating that 'most of the direct MF platforms that started when we launched Coin have either disappeared or pivoted to something else'.
According to Kamath's X post reported by Business Standard, Coin has emerged as the largest direct mutual funds platform in India, with nearly ₹1.6 lakh crore in direct MF AUM. He emphasized that at Zerodha, the company will continue to offer direct mutual funds for free, maintaining its commitment to transparent pricing. Kamath revealed that Zerodha customers have saved 'thousands of crores' in commissions by investing through direct plans, highlighting the significant cost savings available to investors. The platform's growth demonstrates the success of the direct mutual fund model in the Indian market, with Kamath noting that many platforms that launched direct mutual fund offerings around the time Zerodha introduced its Coin platform have since 'disappeared or pivoted to something else'. Remaining competitors are 'rethinking their choice of offering direct plans', according to Kamath's latest social media post. Kamath accompanied his post with a chart comparing the performance of a ₹5,000 monthly SIP in the DSP Large Cap Fund under direct and regular plans, showing the direct plan growing to about ₹19.5 lakh compared with ₹18.3 lakh for the regular plan, with the ₹1.2 lakh gap representing commissions over the investment period. Expense ratios are deducted from the fund's assets every year, and even a small difference between direct and regular plans can compound into a meaningful amount over a long investment horizon.
As reported by Business Standard, Kamath noted that most direct mutual fund platforms that started when Zerodha launched Coin have either disappeared or pivoted to different business models. However, Groww has now clarified its position, stating that direct mutual funds remain 'the heart of Groww' and will continue to be free for DIY investors. The company emphasized that more than 1 crore investors have built over ₹1.9 lakh crore of mutual fund investments on its platform, making it the largest mutual fund platform in the country. Groww assured that 'for every DIY investor, Groww stays exactly what it has always been: direct, zero-commission, and free. Forever', with the company continuing to launch new features for direct mutual fund investors. Zerodha will continue to offer direct mutual funds for free, maintaining its commitment to transparent pricing and eliminating distributor commissions that can reduce investor returns over time through compounding effects. Experts generally advise that investors should not switch solely because a direct plan is cheaper, they should also consider taxation, exit loads, investment objectives and whether they need professional financial advice.
