What happens when you buy a Mutual Fund at Zerodha
- You have funds in your Zerodha account. You buy a fund - lets say Parag Parikh Long Term Equity.
- Zerodha transfers the amount to the AMC - Parag Parikh Financial Advisory Services, and requests the allotment of the Mutual Fund to you.
- The AMC allots the fund to you and notifies the RTA. Since CAMS is the RTA for PPFAS, the record of your unit allotment are kept with them.
- Zerodha keeps the MFs in demat fund, so the funds will be transferred to your Demat account.
- CDSL is the depository for Zerodha, so your demat will be there. The mutual fund units are transferred to your demat account at CDSL.
That is an handful. We will look at each of these entities in detail soon.
Companies are the basic building blocks on which everything in equity market rests. When you buy a stock, you are buying a partial ownership of the company. When you are buying an ETF, you are buying a partial ownership of a basket of companies. When you buy a Mutual Fund you are buying something which will have partial ownership of companies.
Companies are where the buck stops on Equity markets. You peel the layers of anything worth buying in the equity markets, and you will get to ownerships of well run companies.
Mutual funds buy a selection of companies and by paying in, you become a unit holder.Some ways to classify Mutual Funds are:
By Management Style
- Index Fund - They try to own companies in the same ratio as part of an index. Examples in India are Axis Nifty 100 Index Fund & Motilal Oswal Nasdaq 100 Fund of Fund
- Actively Managed Fund - In these mutual funds, the fund manager tries to get better returns than index funds by doing a stock selection. Examples in India are Parag Parikh Long Term Equity and Axis Bluechip Fund.
By Ownership of Assets
- Primarily Equity Oriented - These funds primarily own stocks. Example Axis Nifty 100 Index Fund & Axis Bluechip Fund
- Primarily Debt Oriented - The funds primarily own debts instruments. Example Axis Banking & PSU Debt Fund
- Foreign Equity Oriented - These funds primarily own international equity. Example Motilal Oswal Nasdaq 100 Fund of Fund
By Direct vs Regular
- Regular - Brokers or advisors get paid a commission amount every year by funds of this type
- Direct - The AMC do no pay any commission to brokers or advisors with this type of funds. You always want this.
There are many other ways to classify funds, by taxation, by company size et al.
Asset Management Companies (AMC)
AMCs run the Funds. If the fund is actively managed they decide what to buy and sell. They also accept monies and allot units and handle redemption. There are a number of AMCs in India.
Depositories & Depository Participants (DP)
There are two Depositories in India.
Your demat account will be with one of the DPs. Your Equities and Dematerialised MFs are kept in your demat account held with one of the Depositories.
Depository Participants are agents for DPs. Your broker is a DP.
It doesn’t matter which Depository you use, it will depend on which Depository your broker is tied up with. If you use Zerodha, your stocks and MFs are with CDSL
Registrar and Transfer Agents (RTA)
There are multiple RTAs in India. CDSL maintains a list here. The two which cover most of the AMCs are
What RTA is used depends on the AMC of your Fund. For example, the RTA for PPFAS is CAMS and RTA for Motilal Oswal is Karvy.
It doesn’t matter who your RTA is.
Brokers are the entities who you will have the most interactions with. You will transfer money to them, get allotted units and see your gains and losses on their website.
These brokers provide advisory, handholding and someone to call apart from the ability to buy stocks and MFs.
These are generally barebones brokers which only provide abily to buy and sell. This distinction is blurring over time as discount brokers add more services.
You generally want to be using a discount broker. Zerodha is a discount broker.
Fintech Companies and Apps
There are a number of newer startups proving all in one investing experience. The most famous among these are.
While some people find value in these apps, I found the additional complexity of managing these additional accounts overwhelming. Over time, in interest of simplifying my investing life, I am moving completely to Zerodha.
The RTAs and Depositories have their own apps.
You don’t need to know all the above to start investing. However, if you have a significant percent of your life income invested in equity markets, knowing how entities interplay is valuable.
I started down this rabbit hole trying to have one place to see my networth. It was surprisingly hard.
- Since over time, I had invested via Zerodha, ICICI Direct, Groww and Kuvera, the brokers did not have an unified view of my investments
- RTAs only track mutual funds (and not equity and ETF), they do not have total networth.
- Kuvera and Groww allows importing transactions, but you need to do that manually and there is no way to automate it.
- Kuvera and Groww buy MFs in non-demat mode, so the depositories do not have details of that.