Sebi makes direct plans default: Know how much investors can save on SIPs

Investors opting for regular plans will have to be informed about their higher costs, as the regulator seeks to improve transparency and protect mutual fund investors

From November 1, people buying mutual funds through asset management companies’ (AMCs) websites and apps will see direct plans as the default option. Those choosing regular plans will have to be clearly informed that these schemes carry higher expenses, a move that could help investors save money over the long term.

 

Securities and Exchange Board of India (Sebi) chairman Tuhin Kanta Pandey announced the change at an NDTV Profit event on October 28. The move is aimed at making investors more aware of the cost difference between direct and regular mutual fund plans, particularly when they invest through digital platforms.

 

Both plans invest in the same portfolio and are managed by the same fund manager. However, regular plans include distribution-related expenses, which make their expense ratios higher than those of direct plans.

 

For investors making monthly systematic investment plan (SIP) contributions over 10–20 years, even a small difference in annual expenses can affect the final investment corpus.

 

Direct vs regular mutual fund plans: What is the difference?

Mutual funds offer two versions of the same scheme – direct and regular. The underlying investments, investment objectives and fund managers remain the same. The difference is how investors purchase the scheme and the costs they bear.

 

Direct plans: Investors buy units directly from the AMC without involving a distributor. Since there is no distributor commission, these plans generally have a lower total expense ratio (TER).

 

Regular plans: Investors buy through mutual fund distributors, agents or other intermediaries. The AMC pays distribution commissions, which are included in the scheme's expenses and make the TER higher.

 

The expense ratio is the annual charge deducted from a mutual fund scheme’s assets to cover fund management and operating costs. It is reflected in the scheme’s net asset value (NAV), rather than being collected as a separate bill from investors.

 

The difference may appear small when viewed over a year. However, because expenses reduce the money that remains invested, their impact can accumulate over a long investment period.

 

How much difference can expense ratios make to a Rs 10,000 SIP?

 

The difference in expense ratios may appear small when viewed annually, but its impact can become significant over a long investment period. This is because the expenses reduce the amount that remains invested and compounds over time.

 

Consider an investor putting Rs 10,000 every month into the same mutual fund through direct and regular plans for 20 years. Assuming an annualised return of 12 per cent before expenses, and illustrative expense ratios that reflect the difference between the two plans, the final corpus could look like this:

 

Particulars	Direct plan	Regular plan
Monthly SIP	Rs 10,000	Rs 10,000
Investment period	20 years	20 years
Total investment	Rs 24 lakh	Rs 24 lakh
Estimated corpus	Rs 84.53 lakh	Rs 75.06 lakh

 

The difference works out to approximately Rs 9.47 lakh in favour of the direct plan, despite both investments having the same underlying portfolio and assumed pre-expense return.

 

The illustration shows how distribution-related expenses can affect long-term wealth creation. However, these figures are indicative, not guaranteed returns. The actual difference will depend on the scheme's expense ratios, investment performance and the gap between its direct and regular plans.

 

Should investors always choose direct plans?

 

A lower expense ratio does not automatically make a direct plan the right choice for every investor. The decision should also depend on how comfortable an investor is with selecting and managing mutual funds.

 

Direct plans may be suitable for investors who:

 

Understand different mutual fund categories and their risks.

 

Can assess whether a scheme fits their financial goals and investment horizon.

 

Are comfortable comparing funds and monitoring their portfolios independently.

 

Regular plans may be more suitable for investors who need assistance with fund selection, portfolio reviews and ongoing investment guidance. The additional cost can be justified if the distributor provides useful services and helps the investor avoid unsuitable investment decisions.

 

Investors should, however, understand that distributor advice does not guarantee better returns or protect them from market losses.

 

Will existing regular mutual fund investments be converted?

 

No. The change does not mean regular plans will be discontinued or that existing investments and SIPs will automatically shift to direct plans.

 

The new default applies to investment choices made through AMC digital platforms from November 1. Investors can still select regular plans, but they must be made aware of the higher expense ratio.

 

Those who already hold regular plans should not rush to switch merely because direct plans are becoming the default. Moving from a regular plan to a direct plan is treated as a switch, which involves redeeming units from one plan and purchasing units in another.

 

Such a switch can have tax implications, including capital gains tax, and may attract exit loads depending on the scheme and holding period. Investors should calculate these costs before making a decision.

 

What should mutual fund investors do now?

 

The change makes it more important to review the costs associated with existing and new mutual fund investments.

 

Investors should consider three things:

 

Compare expense ratios: Check the direct and regular plan expense ratios of the same scheme before investing. Do not compare only the headline returns.

 

Evaluate the value of advice: If a distributor provides meaningful financial planning and portfolio guidance, assess whether the service justifies the additional cost.

 

Review existing investments carefully: Calculate potential tax liabilities and exit loads before switching from regular to direct plans.

 

Sebi's move comes amid a widening gap between awareness of financial products and actual participation in the securities market. According to the regulator's investor survey cited by Pandey, 63 per cent of Indian households were aware of at least one securities market product, but only around 9.5 per cent participated in the markets.

 

The regulator's objective is not simply to push investors towards cheaper products. It is also to ensure they understand the costs and risks attached to their investment decisions.

 

For long-term mutual fund investors, the change is a reminder that returns depend not only on market performance but also on how much they pay to access and manage their investments.