If you buy a mutual fund from the fund house itself, the first option you see is about to change. From November 1, direct plans will be the default on the digital platforms of asset management companies, market regulator SEBI has said. Anyone who still wants a regular plan will have to be told that it costs more.
The announcement came on October 28 from SEBI Chairman Tuhin Kanta Pandey, speaking at the NDTV Profit IGNITE event in Mumbai. “Protection also depends on what investors are told,” Pandey said. “From November 1, Direct Plans will be the default option on digital platforms of AMCs. Investors choosing Regular Plans must be informed about their higher expense ratio.”
What is actually changing
Direct and regular plans are two ways of buying the same mutual fund scheme. They hold the same portfolio, are run by the same fund manager, and carry the same investment objective. The difference is distribution.
A direct plan is bought straight from the asset management company, with no distributor in the middle. A regular plan is bought through a distributor, bank or adviser, and the commission paid to that intermediary sits inside the plan’s expense ratio. That is why the regular plan of a scheme almost always costs more each year than the direct plan of the same scheme.
From November 1, fund houses must show the direct plan as the default on their websites and apps, and anyone choosing a regular plan must be told about its higher expense ratio. SEBI has also made it mandatory for consolidated account statements to disclose the commission paid to distributors on SIP transactions through regular plans.
Two limits matter. The change refers to asset management companies’ digital platforms, not every independent investment platform. And nothing in the announcement says existing regular plan holdings will switch automatically.
Why a small percentage matters
Distributors earn trail commissions of 0.50 to 1.17 per cent on equity schemes, 0.70 to 1 per cent on ELSS tax-saving funds, 0.50 to 0.80 per cent on hybrid and balanced advantage funds, and 0.20 to 0.50 per cent on debt funds, according to figures cited in reports of the announcement.
Small annual differences add up. If a regular plan’s expense ratio is 0.5 percentage points higher than the direct plan of the same scheme, the gap on Rs 5 lakh works out to Rs 2,500 over a year, assuming the value stays unchanged. The real difference varies with the size of the investment and the scheme’s expense ratios. Over 10 to 12 years, that yearly drag is money not left in the fund to generate returns.
A lower expense ratio does not remove investment risk, and it does not guarantee better performance before expenses. Returns still depend on the portfolio and market conditions.
Who gains, and who keeps paying for advice
Feroze Azeez, joint CEO of Anand Rathi Wealth, told BusinessLine the change may not significantly affect distributors’ income. Investors who buy directly through a fund house website tend to be do-it-yourself investors, he said, and they usually pick direct plans already.
Investors who rely on a distributor for fund selection and ongoing guidance are likely to stay with regular plans, Azeez said, because they value the service. The reform, on that reading, improves transparency rather than breaking distribution: the person who wants advice keeps paying for it, with the cost labelled more clearly, while the person who does not need advice is no longer nudged into paying for it by default.
What to check before you act
- Compare like with like. Check the expense ratios of the direct and regular plans of the same scheme, not two different schemes.
- Ask what the regular plan buys you. If a distributor helps with selection and monitoring, decide whether the extra cost is worth it for you.
- Do not rush a switch. Moving to a direct plan generally means redeeming units and buying again, which may trigger capital gains tax and exit loads.
- Read the statement. With commission disclosed on consolidated statements for SIPs through regular plans, check what you actually paid.
A wider clean-up
Pandey’s speech went beyond mutual fund costs. SEBI is also reviewing rules for main-board IPOs, follow-on offers, SME IPOs and the Innovators Growth Platform, and studying net settlement for mutual fund transactions. The message was about trust: the price should be visible where the decision is made.
FAQs
What changes from November 1?
Direct plans become the default on asset management companies’ digital platforms, and regular plan buyers must be told about higher expense ratios.
Will existing regular plan investments switch automatically?
No. A switch generally involves redemption and repurchase, with possible tax and exit-load implications.
What is the difference between direct and regular plans?
Both invest in the same scheme and portfolio. Direct plans have no distributor commission and lower expense ratios. Regular plans include distributor commission in a higher expense ratio.
Does a direct plan guarantee higher returns?
No. Lower costs can help over time, but returns depend on the portfolio and markets. Investment risk remains.
Should I choose direct or regular?
Direct suits confident, self-directed investors. Regular may suit those who value advice, provided they understand the extra cost.
Mutual fund investments are subject to market risks. This article explains a regulatory change and is not investment advice. Compare expense ratios for the same scheme and consider speaking to a qualified financial adviser.
