Explained: Why Sebi wants mutual fund investors to switch to direct plans

The Securities and Exchange Board of India (Sebi) has mandated that mutual fund houses make direct plans the default option on their digital platforms starting November 1, 2021. This decision aims to simplify investing in mutual funds for retail investors. Direct and regular plans are two methods of investing in mutual fund schemes.

Direct plans allow investors to invest directly in a scheme without involving any distributor, broker, or agent, while regular plans require the involvement of such intermediaries, who receive a commission from the fund house, hence increasing the expense ratio.

According to the latest figures from the Association of Mutual Funds in India (AMFI), the total expense ratio (TER) for regular plans ranges from 0.36% to 4.3%, whereas direct plans have a TER ranging from 0% to 2.7%. Sebi’s move is expected to benefit investors by reducing costs, which over time can significantly impact their returns.

While direct plans are generally recommended for investors who can manage their investments independently or with professional advice, regular plans may be suitable for those who prefer professional guidance or are new to mutual funds. However, critics argue that regular plans can foster conflicts of interest due to the commissions paid to distributors, leading to recommendations based on potential higher commissions rather than the client’s best interests.

By switching to direct plans, investors can save money, as demonstrated by a hypothetical investor who would accumulate around Rs 94.4 lakh in a direct plan with a 0.7% expense ratio over 15 years, compared to Rs 86 lakh in a regular plan with a 1.7% expense ratio.