SEBI direct plans will become the default option on mutual fund house websites from 1 November, under a direction from the capital markets regulator announced on Wednesday, 28 October. Securities and Exchange Board of India chairman Tuhin Kanta Pandey said at the NDTV Profit IGNITE event in Mumbai that all mutual fund houses must make a direct plan the default for investments made through their websites. Investors who still choose a regular plan must be told about its higher expense ratio.
Direct and regular plans are two options of the same mutual fund scheme, and both invest in the same portfolio. The difference lies in cost. Direct plans are bought straight from the fund house, without distributor commissions, so their expense ratios are lower. Regular plans are bought through distributors or intermediaries, and their expense ratios are higher because they include distribution costs. The SEBI direct plans rule makes that cost gap visible at the point of purchase, and it applies to every fund house website from the November deadline.
SEBI direct plans and what changes on 1 November
From 1 November, a person who visits a fund house website to invest will see a direct plan offered first. The change applies to digital platforms run by asset management companies. It does not end regular plans, and it does not move existing regular plan holdings into direct plans on its own. An investor who wants a regular plan can still choose one, but the platform must inform that investor about the higher expense ratio before the purchase goes through.
Pandey said the move forms part of efforts to strengthen investor protection and improve transparency about investment costs. The announcement did not say whether the default will extend to third party investment platforms, or how each fund house app will present the choice. Those details will become clear as fund houses update their websites and apps ahead of the deadline.
SEBI direct plans and distributor commissions
Alongside the default change, SEBI has made it mandatory for consolidated account statements to disclose the commission paid to distributors on all systematic investment plan transactions through regular plans. The disclosure gives investors a rupee figure for what distribution costs them, rather than leaving the cost inside the expense ratio. Distributors earn trail commissions of 0.50 to 1.17 percent on equity schemes, 0.70 to 1 percent on tax saving ELSS funds, 0.50 to 0.80 percent on hybrid and balanced advantage funds, and 0.20 to 0.50 percent on debt funds.
The commission figures explain why the SEBI direct plans change matters over long periods. A difference of even half a percent a year in expenses compounds across years of systematic investment, and regular plan investors have often paid it without seeing it as a separate line. The new statement disclosure puts the number in front of the investor each time a consolidated statement arrives. For distributors, the SEBI direct plans change also raises the bar on explaining what their service adds, since the cost gap will now sit in plain view.
Other reforms announced with SEBI direct plans
Pandey outlined wider reforms at the same event. SEBI is examining net settlement for mutual fund transactions, which would streamline fund flows across the industry. The regulator is also to cut the onboarding time for foreign portfolio investors to five business days. A surveillance tool called R(AI)DAR, earlier used to audit mutual fund advertisements, will be widened to cover promotional material from all market intermediaries. The SEBI direct plans change is part of the package that touches retail investors most directly, since it alters the first option every new online investor sees.
The SEBI direct plans rule arrives as the mutual fund industry serves a growing base of first time investors who buy online. For those investors, the default option on a website often becomes the plan they hold for years. Making the lower cost plan the default, and forcing a clear warning on the higher cost plan, shifts that starting point. Fund houses have until 1 November to put the change in place. Investors who already hold regular plans need not act, since the rule changes the default for new purchases on fund house websites rather than converting old holdings. Anyone unsure which plan they hold can check the plan name on their account statement, where direct and regular plans are labelled separately.