Direct mutual fund plans will become the default option on asset management companies’ (AMCs) digital platforms from November 1, Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey said on October 28.
Investors choosing regular plans must be informed about their higher expense ratios.
In his address at NDTV Profit IGNITE in Mumbai, Pandey said the move was part of SEBI’s efforts to strengthen investor protection and improve transparency about investment costs.
Here is what the change means for mutual fund investors.
What is the difference between direct and regular mutual fund plans?
Direct and regular plans of the same mutual fund scheme invest in the same portfolio and are managed by the same fund manager. They differ primarily in their distribution arrangements and expense ratios.
Direct plans are purchased without a distributor, while regular plans are purchased through a distributor or intermediary. Regular plans generally have higher expense ratios because their costs include distributor commissions.
The expense ratio is the annual cost of managing and operating a mutual fund scheme, expressed as a percentage of its assets. It is deducted from the scheme’s assets and affects the returns available to investors.
How can a lower expense ratio affect returns?
Since direct plans generally have lower expense ratios than regular plans of the same scheme, investors in direct plans can earn higher net returns over time, assuming all other factors remain the same.
The difference may become more significant over longer investment periods because expenses reduce the amount of money that remains invested and compounds over time.
However, the choice between direct and regular plans also depends on whether an investor needs distribution services or assistance with investment decisions.
What will change from November 1?
According to Pandey’s announcement, direct plans will become the default option on AMC digital platforms from November 1. Investors choosing regular plans must be informed about their higher expense ratios.
The announcement does not specify whether the change will extend to third-party investment platforms or how the default option will be presented on individual AMC apps.
FAQs: What mutual fund investors need to know from November 1
Will existing regular mutual fund investments automatically switch to direct plans from November 1?
Pandey’s statement does not say that existing investments will automatically switch from regular to direct plans. It refers to direct plans becoming the default option on AMC digital platforms. Investors should not assume that their existing holdings will change automatically.
Will investors still be able to invest in regular mutual fund plans?
Yes. The announcement explicitly refers to investors choosing regular plans and says they must be informed about their higher expense ratios. It does not announce the discontinuation of regular plans.
NOTE TO READERS
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers should consult certified experts before making any investment decisions.