Mutual fund rules change from November 1, direct plans to become default option on AMC platforms

Market regulator SEBI will make direct mutual fund plans the default option on asset management companies' digital platforms from November 1, changing how millions of investors pick their funds online.

Under the change, if an investor selects a regular plan, they will first be told about its higher expense ratio, SEBI chairman Tuhin Kant Pandey said in a television interview, as part of efforts to simplify rules and protect investors.

The move comes as mutual fund investing has grown rapidly in recent years, and SEBI is reviewing listing and disclosure rules, considering net settlement for mutual fund transactions, and tightening oversight of listed companies, including firms with little or no real economic activity that function like shell companies.

What changes on November 1

From November 1, direct mutual fund plans will automatically appear as the first option on digital platforms run by asset management companies, while choosing a regular plan will trigger a warning about its higher costs.

The change applies to AMC digital platforms for now, and SEBI has not yet clarified whether all independent investment platforms will adopt the same default rule, or what will happen to existing investors.

Direct vs regular, what is the difference

A scheme's direct and regular plans invest in the same place and are managed by the same fund manager, but the regular plan carries a distributor's commission, which makes its expense ratio higher.

Since these costs are deducted from the fund's assets, a higher expense ratio can reduce an investor's net returns over time, with other things remaining equal.

Experts say switching from a regular plan to a direct plan can attract capital gains tax and exit load, so investors should not switch without thinking it through.

What should investors do

Investors should check which plan they are buying before investing, compare expense ratios, and understand the service they are getting, mutual fund experts say.

Those who can choose funds themselves can save money through direct plans, while those who need advice can opt for regular plans, provided they are aware of the costs involved.

The SEBI chief's announcement is part of a wider push to improve investor protection as stock market participation grows, citing an investor survey that found 63 percent of families knew about at least one market product, but only 9.5 percent actually invested in the market.