Mutual fund direct plans to become default on AMC apps from November 1; what investors need to know

SEBI chairman Tuhin Kanta Pandey has announced that direct mutual fund plans will become the default option on asset management companies’ (AMCs) digital platforms from 1 November. Investors who choose regular plans will have to be informed about their higher expense ratios, a move aimed at improving transparency around mutual fund costs. The announcement, made at NDTV Profit Ignite in Mumbai on 28 October, comes as more Indian households invest in mutual funds through systematic investment plans (SIPs) and digital platforms.

The change seeks to ensure investors are more aware of the costs associated with their investment choices. “Protection also depends on what investors are told,” Pandey said in his address, adding that direct plans would become the default on AMC digital platforms from 1 November. Direct vs regular mutual fund plans: How costs differDirect and regular plans of the same mutual fund scheme invest in the same portfolio and are managed by the same fund manager.

The main difference lies in distribution costs and the expense ratio charged to investors. Direct plans are purchased without a distributor and generally have lower expense ratios. Regular plans are purchased through mutual fund distributors, with distribution commissions reflected in the scheme’s expenses.

Since expenses are deducted from the scheme’s assets, a higher expense ratio can reduce investors’ net returns over time, all else being equal. For example, if the annual expense ratio of a regular plan is 0.5 percentage points higher than that of its direct counterpart, the difference on an investment of ₹5 lakh would amount to ₹2,500 over a year, assuming the investment value remains unchanged throughout that period. The actual difference will vary with the value of the investment and the expense ratios applicable to the scheme.

Over longer investment horizons, even small differences in costs can affect the final corpus because expenses reduce the amount available to generate returns. Investors should compare the expense ratios of the two plans of the same scheme rather than comparing plans across different schemes without accounting for differences in investment strategy and risk. Should investors switch to direct plans?

The lower expense ratio does not automatically make a direct plan suitable for every investor. Those who can research mutual funds, assess risk and manage their portfolios independently may benefit from the lower costs. Investors who rely on distributors for assistance with fund selection and transactions may prefer regular plans, provided they understand the expenses involved.

Investors should also remember that switching from a regular plan to a direct plan is not simply a change in account settings. It generally involves redeeming existing units and purchasing units under the direct plan, which can trigger capital gains tax and applicable exit loads. Investors should check these implications before making a switch.

What investors should watch forPandey’s announcement forms part of SEBI’s broader effort to improve investor protection as participation in securities markets expands. In his address, he cited the regulator’s investor survey, which found that 63% of households were aware of at least one securities-market product, but only about 9.5% participated in the market. Among investors, just 36% had moderate or high market knowledge.

The stated change applies to AMC digital platforms. The speech does not establish that all independent investment platforms will adopt the same default or specify how existing investments will be treated. Investors should therefore check the plan they are buying, compare expense ratios and understand the services offered before investing.

The lower-cost option can help improve net returns over time, but the choice between direct and regular plans should also reflect the investor’s need for guidance and ability to manage investments independently.