According to Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey, investors who begin investing in a mutual fund scheme through an AMC's digital platform without selecting a specific plan will automatically be directed to the Direct Plan.
Pandey made the announcement at an event organised by a media company in Mumbai. He also said that investors choosing Regular Plans will have to be informed about the expense ratio associated with them.
SEBI has taken this step to improve investors' understanding of the costs involved in mutual fund investments and enable them to make informed investment decisions.
What Is the Difference Between Direct and Regular Mutual Fund Plans?
Direct and Regular Plans are offered under the same mutual fund scheme. Both have the same portfolio and fund manager, but differ in their investment process and associated costs.
Under a Direct Plan, investors invest directly with the mutual fund company. In a Regular Plan, investments are made through a distributor.
Regular Plans generally include distributor commissions, which result in a higher expense ratio compared to Direct Plans.
The expense ratio refers to the annual cost of managing a mutual fund scheme. This expense is deducted from the scheme's assets and affects the actual returns received by investors.
Since Direct Plans have a lower expense ratio, investors may potentially earn higher net returns over the long term compared to Regular Plans of the same scheme.
The difference in expenses can also affect the power of compounding over an extended period. Lower expenses mean a larger portion of the investment remains in the fund to generate returns.
Will Regular Mutual Fund Plans Be Discontinued?
SEBI's decision to make Direct Plans the default option for mutual fund schemes from November 1 does not mean Regular Plans will be discontinued.
Investors will continue to have the option of choosing Regular Plans. However, mutual fund companies will have to disclose information about their higher expense ratios to investors opting for them.
The move to make Direct Plans the default option is intended to increase awareness about lower-cost investment alternatives and help investors understand the cost implications of their choices.
However, it remains unclear whether the new default option will also apply to third-party investment platforms.
Investors are therefore advised to check the applicable rules and conditions on AMC platforms before making an investment.
The change is expected to make investment costs more visible to investors at the time of choosing a mutual fund plan, while retaining the option to invest through Regular Plans.
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