SEBI's new direct mutual fund rule kicks in from November 1. What changes for investors and should you switch?

SEBI has directed mutual fund houses to make direct plans the default option on their digital platforms from 1 November. Here is what changes for investors and whether they should switch, as reported by ET Bureau.

From 1 November, SEBI has directed mutual fund houses to make direct plans the default option on their websites and mobile apps. This means that when an investor visits a fund house's platform to invest in an equity scheme, the direct plan will be pre-selected or displayed as the primary option. However, investors can still opt for regular plans if they prefer investing through a distributor and need assistance with their investments.

Direct and regular plans are two ways to invest in mutual funds. Direct plans are bought without an intermediary and have lower expense ratios as no commission is paid. Regular plans are purchased through distributors or advisers, with the commission cost included in the scheme's expenses.

Regular plans may suit investors who need professional guidance, as distributors manage portfolios and review investments periodically. However, their higher costs and commission-based structure may create conflicts of interest, with some distributors favouring schemes that offer higher commissions.

Even a small difference in expense ratios can significantly affect long-term returns. For instance, a Rs 20,000 monthly SIP over 15 years, assuming 12% annual returns, could grow to Rs 94.4 lakh in a direct plan with a 0.7% expense ratio, compared with Rs 86 lakh in a regular plan with a 1.7% expense ratio. The difference is due to lower costs and the benefit of compounding.

Direct plans are suitable for investors who can independently research funds, monitor portfolios and make investment decisions. Those who understand asset allocation, risk management and portfolio rebalancing, and can stay invested through market cycles, may consider direct plans.