SEBI directed all mutual fund houses to make direct plans the default option for website investments from November 1. This move pushes transparency on costs and commissions. Feroze Azeez said, "The change will improve transparency rather than disrupt the distribution ecosystem." Investors now get clearer details about their regular plan expenses.
Capital markets regulator SEBI has directed all mutual fund houses to make the ‘direct’ plan the default option for investments made through their websites from November 1.
Investors opting for regular plans must be informed about their higher expense ratios to help them understand the additional costs of investing through a distributor, said Tuhin Kanta Pandey, SEBI Chairman, at an event on Wednesday.
Direct and regular plans are two different options of the same mutual fund scheme. Both invest in the same underlying portfolio.
Direct plans are purchased directly from the mutual fund house, without distributor commissions, and therefore have lower expense ratios than regular plans.
Although mutual fund houses do not offer regular plans on their websites, SEBI wants to ensure investors are made aware of the cost implications if they switch to a regular plan, said the CEO of a leading fund house.
SEBI has also made it mandatory for consolidated account statements (CAS) to disclose the commission paid to distributors on all SIP transactions through regular plans, he added.
Regular plans are purchased through distributors or intermediaries and have higher expense ratios, as they include distribution costs. While commission charges may be small, they add up over a 10–12-year investment period.
Feroze Azeez, Joint CEO of Anand Rathi Wealth, said the change may not significantly affect distributors’ income, as investors who buy mutual funds directly through AMC websites are generally do-it-yourself (DIY) investors who typically opt for direct plans. Making direct plans the default option is unlikely to materially change their behaviour, he said.
Investors who rely on distributors for financial planning, fund selection, portfolio construction, and ongoing guidance are likely to continue investing in regular plans through them, as they value the services and support provided, he added.
However, the change will improve transparency rather than disrupt the distribution ecosystem, as investors who currently rely on distributors are likely to continue doing so, he said.
Mutual fund distributors earn trail commissions of 0.50–1.17 per cent on equity schemes, 0.70–1 per cent on ELSS (tax-saving) funds, 0.50–0.80 per cent on hybrid and balanced advantage funds, and 0.20–0.50 per cent on debt funds.