SEBI Makes Direct Mutual Fund Plans Default to Highlight Costs

On October 28, 2026, Tuhin Kanta Pandey, chairman of the Securities and Exchange Board of India (SEBI), announced a significant change aimed at enhancing transparency for mutual fund investors. From now on, direct plans will be set as the default option on the digital platforms operated by fund houses. Investors opting for regular plans must be clearly informed about the higher costs associated with those choices.

Direct plans, which have been available for nearly 14 years, offer lower expense ratios compared to regular plans. Renu Maheshwari, co-founder and principal adviser at Finscholarz Wealth Managers, explained that this move intends to increase investor awareness about the impact of expense ratios on returns.

Previously, some asset management companies (AMCs) made it easy for investors to unknowingly pick regular plans. Avinash Luthria, a SEBI-registered investment adviser and founder of Fiduciaries, pointed out that at one major AMC, investors had to manually deselect a prechecked box to avoid continuing with a regular plan. Vedant Gupte, CEO of investment platform Trackk, noted that making direct plans the default forces investors to consciously opt for the higher-cost regular plans, potentially preventing accidental selections.

This change is especially beneficial for young investors starting systematic investment plans (SIPs) with long time horizons and smaller contributions. Due to compounding, even small expense differences can lead to substantial differences in the investment corpus over decades. M Pattabiraman, associate professor at IIT Madras and founder of Freefincal, highlighted that this update might encourage investors who have lost contact with distributors to switch to direct plans, saving on unnecessary fees.

It is important to note that this default setting applies only to fund houses’ own digital platforms. Bank branches, distributor apps, and third-party platforms are not covered. Many investors still mistakenly believe that regular plans incur a one-time commission, but Luthria clarifies that the higher fees apply to every installment invested under regular plans.

Expense ratios directly affect net returns by reducing the compounding effect of investments. Maheshwari emphasized that while investors cannot control market performance, they can control the expense ratio they pay. For instance, a monthly SIP of ₹10,000 over 20 years at a 12% return in a direct plan can grow to approximately ₹99.9 lakh. In contrast, at an 11% return typical of regular plans, the corpus would be around ₹87.35 lakh—a difference of about ₹12.56 lakh, which exceeds half of the total ₹24 lakh invested.

Investors confident in managing their asset allocation and maintaining discipline during market downturns are better suited for low-cost direct plans. Gupte advises that the key test is the ability to stay invested through significant losses, not just selecting funds. Regular plans may be appropriate for those who require more guidance or risk exiting investments prematurely. However, Dhawan, CEO of Plan Ahead Wealth Advisors, insists that distributors charging higher fees should provide continuous monitoring and review services to justify those costs.

For investors unable to construct their own portfolios, Maheshwari recommends choosing direct plans and separately paying for advisory services. Hiring a fee-only fiduciary advisor ensures transparent advice without conflicts of interest inherent in commission-based sales. This model replaces hidden, ongoing sales fees with accountable, client-focused guidance.

Understanding expense ratios is critical when selecting active funds, which include fund management fees and commissions. The difference between direct and regular plans mainly reflects commission costs. Maheshwari advises combining passive funds for core holdings with active funds for satellite allocations. Evaluating active funds should involve examining consistent alpha generation, risk-adjusted returns, and performance metrics such as Sharpe ratios and downside capture.

Expense management is particularly crucial for debt funds due to their lower returns. An expense ratio around 0.8% can consume 10-12% of overall yield. Maheshwari warns that higher fees may lead managers to take on credit or duration risks to boost returns, increasing portfolio risk. Dhawan stresses that monitoring expenses helps avoid unnecessary risk in debt portfolios.

Passive funds, such as index funds and ETFs, demand careful attention to expense ratios and tracking error since they aim to replicate market performance rather than outperform it. Some index funds operate as fund-of-funds investing in ETFs, which can raise costs slightly. Investors should ensure these added expenses remain reasonable. Additionally, Luthria cautions investors to focus on the long-term base expense ratio rather than initially low rates that fund houses might raise later.

This new SEBI directive aims to make investment costs more transparent and encourage investors to opt for lower-fee direct plans whenever suitable. While it does not cover all distribution channels, the policy is a step toward helping investors understand how fees can impact long-term wealth accumulation.