#29 How do online mutual fund companies like Groww & Zerodha's Coin make money?
#29 How do online mutual fund companies like Groww & Zerodha's Coin make money?
There ain't no such thing as a free lunch
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Online Mutual Fund Platforms
Online mutual fund platforms like Groww, Zerodha Coin, Paytm, Kuvera, Upstoxx are all the rage these days. Groww recently reached a unicorn status after gaining popularity among millennials. These apps have a simple value proposition for new investors - zero fee mutual fund investments.
This begs the question: how do these companies make money if there’s no fee to buy mutual funds?
How do Mutual Funds work
Mutual funds pool money from the investing public and use that money to buy other securities, usually stocks and bonds.
Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors.
These fund managers charge a fixed management fee and a variable 1-3% of the return of the fund to manage the operations of the fund.
So, the incentive for the fund managers is to have a larger pool of investors investing in the fund. They incentivise distributors/brokers/agents by passing some commission to bring in new investors.
There are two kinds of mutual funds - Regular and Direct.
Regular - buying mutual funds through a broker/advisor/distributor. There are many online platforms that act as distributors eg. Scripbox, Wealthy. 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. So hypothetically if you make an 8% return, you receive only 7% as the distributor takes 1%.
Direct - buying mutual funds through an Asset Management Company (AMC) or through companies like Groww, Zerodha, Kuvera & Paytm Money.
AMC’s 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. Also, you can’t see the consolidated portfolio performance on a single screen.
Companies like Groww enable the investors to invest directly in multiple mutual fund houses without any commission - in one place.
How do aggregators of Direct MF make money?
They don’t.. atleast not from the Mutual Funds vertical of their business.
Providing zero-fee direct mutual funds is their lead generation engine to cross-sell other products like stock-trading, digital gold, fixed deposits, insurance, wealth-management, lending etc.
In some cases, these companies make money off B2B services.
Fintech products are one of the stickiest. Unlike, ecommerce portals or cab-booking apps, where users are always hunting for the best deals, users of fintech platforms do not move their funds from one platform/bank to another. So if you sign-up for zero-fee mutual fund investment and then want to start stock-trading, Groww would charge you an intra-day trading fee.
In one of the recent interviews, Groww’s CEO Lalit Keshre said “In the future, we might explore premium subscription plans with advanced tools and advisory for mutual funds. "
The bet that Groww and other companies are making is that they will bring new first time investors onto their platform and then monetize them in the future. It’s working well so far with Groww reporting 15M+ investors on its platform now!
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