From November 1, Fund Houses Must Show You the Cheaper Mutual Fund Plan First

SEBI is making direct plans the default on AMC websites and apps. Here is what changes, what doesn’t, and how to check what your own SIPs are really costing you.

Starting this Sunday, 1 November, something small but important changes when you invest in a mutual fund on a fund house’s own website or app.

The default option will be the direct plan. If you want the regular plan instead, the one that pays a commission to a distributor, the platform has to tell you that it costs more. SEBI Chairman Tuhin Kanta Pandey confirmed this at an event this week, as reported by The Economic Times and Moneycontrol.

It sounds like a settings change. For a lot of people, it is the first time anyone will have spelled out, at the moment of investing, that the same fund comes in two prices.

I run Invsify, a SEBI-registered fee-only investment adviser, so the gap between those two prices is something I think about every day. Here is my plain-language read of the change.

Same fund, two price tags

Every mutual fund scheme in India comes in two versions.

The regular plan includes a commission that the fund house pays to whoever sold it to you: a bank relationship manager, a distributor, an agent. You never see a bill. The commission sits inside the fund’s expense ratio and is quietly taken out of the fund’s value every day.

The direct plan is the exact same portfolio, run by the exact same fund manager, holding the exact same stocks or bonds. It just leaves out the distributor’s commission, so its expense ratio is lower.

The difference is often somewhere around half a percentage point to over one percentage point a year, depending on the fund. You can check the exact figure for your own funds on the fund house’s website or on AMFI’s expense ratio pages.

One percent a year doesn’t sound like much. Over a long SIP, it is a lot.

What one percent does to a 20-year SIP

Here is a simple illustration. The return figures below are assumptions to show the effect of costs, not a forecast for any fund.

Say you invest ₹10,000 a month for 20 years.

• If your fund earns 12% a year after costs, you end up with roughly ₹99.9 lakh.
• If the same fund earns 11% a year because you are paying one percentage point more in expenses, you end up with roughly ₹87.4 lakh.

That is a gap of about ₹12.6 lakh, on the same fund, with the same fund manager, for the same 20 years of discipline. Stretch it to 25 years and the gap grows to around ₹30 lakh.

Nobody sends you an invoice for that. That is exactly why the new default matters.

What actually changes on 1 November

Based on what SEBI has said publicly so far:

1. Direct is the default on AMC digital platforms. When you buy through a fund house’s own website or app, the direct plan is preselected.
2. Regular plan buyers get told about the cost. If you choose a regular plan, you have to be informed that its expense ratio is higher.
3. More visibility on commissions. SEBI has also been pushing for distributor commissions on regular plans to be shown more clearly in investor statements, as The Hindu BusinessLine reports.

What does not change: your existing SIPs don’t automatically switch. If you started a regular-plan SIP years ago through a bank, it keeps running exactly as before. And the rule is about fund houses’ own platforms, so a pitch from a relationship manager or a distributor’s app still deserves a careful look at which plan you are being signed up for.

Is the regular plan always a bad deal?

No, and I want to be fair here.

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A regular plan bundles a service with the product. A good distributor can help you start, keep you from panic-selling in a crash, and handle the paperwork. For some people, that hand-holding is worth paying for.

The problem is not that advice costs money. The problem is that in a regular plan the cost is invisible, it grows as your portfolio grows, and the person being paid is paid by the fund house, not by you. Their incentive is tied to what you buy, not to whether it was the right thing for you.

There are two cleaner ways to handle it:

• Do it yourself in direct plans if you are comfortable choosing funds and sticking to a plan.
• Pay for advice separately and invest in direct plans. This is how fee-only advice works. You pay the adviser, the adviser earns nothing from the funds, and the fee does not grow just because your portfolio did.

This is the model we use at Invsify. Our Private plan is a flat ₹8,999 a year, and Invsify ONE costs 1.5% capped at ₹8,999. We don’t take commissions from any fund house. On a large portfolio, a flat fee can work out much cheaper than an invisible percentage that rises every year, but the real point is that you can see exactly what you are paying.

A 15-minute check you can do this weekend

You don’t need any new rule to act on this. Here is what I would do:

1. Download your Consolidated Account Statement (CAS) from CAMS, KFintech or NSDL/CDSL. It lists every fund you hold.
2. Look for the word “Regular” or “Direct” in each scheme’s name. Most statements show it.
3. Compare expense ratios. For each regular plan, look up the direct plan of the same scheme and note the difference.
4. Do the rough maths. Multiply the gap by your current holding. On ₹10 lakh, a one-point gap is about ₹10,000 a year, and it compounds.
5. Think before you switch. Moving from regular to direct is a redemption and a fresh purchase. That can trigger capital gains tax and, for recent purchases, an exit load. Often the sensible approach is to start new SIPs in direct plans and move older holdings gradually, using your yearly long-term capital gains exemption where it helps.

That last step is where people tend to get stuck, because the right answer depends on your tax slab, your holding periods and your goals. It is also exactly the kind of question a fee-only adviser should answer without trying to sell you anything.

The bigger picture

SEBI’s chairman also said that while 63% of households know about at least one market product, only around 9.5% actually participate. Easier access is good. But access without understanding costs is how people end up paying lakhs over their lifetime without knowing it.

Making the cheaper plan the default is a quiet nudge in the right direction. The rest is up to us as investors: know what you own, know what it costs, and pay for advice in a way you can actually see.

If you’d like a second pair of eyes on whether your SIPs are in the right plans, and what switching would cost after tax, book a free first call with Invsify. We’re a SEBI-registered investment adviser (INA000020572), we charge a flat fee, and we never earn commissions on what you buy.

This article is for education only and isn’t investment advice. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.