Direct vs regular mutual funds: What changes under SEBI’s new default plan rule?

When you select a mutual fund, you are likely to examine its past returns, investment strategy and the risks involved. However, the decision to invest through a regular or direct mutual fund plan can also influence the amount you eventually accumulate. Both plans invest in the same underlying portfolio, yet the difference in their recurring expenses affects how much of the fund’s returns remain invested on your behalf.

This cost difference has recently received regulatory attention. On 28 October 2026, Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey announced that direct plans would become the default option on asset management companies’ (AMCs) digital platforms from 1 November 2026. Investors selecting regular plans would also be informed about their higher expense ratios.

The announcement brings an often-overlooked investment cost into focus. You can continue investing through a regular plan and receiving assistance from an intermediary. However, knowing how much that arrangement costs over several years gives you a clearer basis for choosing between the two plans.

Direct vs regular mutual funds: Why do your returns differ?

When you invest in a mutual fund scheme, your money is pooled with contributions from other investors and managed according to the scheme’s investment objective. Its direct and regular plans share the same portfolio and fund manager, although you incur different expenses depending on the plan selected.

A regular mutual fund allows you to invest through an intermediary, who can assist with scheme selection, transactions and investment-related services. That intermediary then receives a commission from the AMC, funded through the regular plan’s recurring expenses, increasing the overall expense ratio. With a direct mutual fund, you invest directly in that scheme, without any intermediary’s help; this removes the commission part, resulting in a lower expense ratio.

The Total Expense Ratio (TER) expresses these annual expenses as a percentage of its assets, are charged to the fund and reflected in its Net Asset Value (NAV), which is the value of each mutual fund unit after accounting for expenses and liabilities. Since the regular plan incurs additional distribution expenses, its NAV and returns differ from those of the direct plan over time.

Why has SEBI brought attention to direct mutual funds?

SEBI’s announcement is intended to make the cost difference more apparent when you purchase mutual funds digitally. Now, direct plans will appear as the default selection on AMC digital platforms from 1 November 2026, while investors choosing regular plans will be informed about their higher expense ratios.

The scale of distribution expenses in India provides context for this measure. According to 1 Finance’s research, investors collectively paid an estimated ₹27,335 crore in mutual fund distribution commissions during FY2024–25. The figures reveal the scale of the mutual fund distribution business and the expenses associated with it. So, what services are you receiving in exchange for the distribution cost included in your regular mutual fund investment?

This commission is generally linked to the value of mutual fund assets serviced, through an ongoing arrangement known as trail commission. As long as your investment remains in a regular plan, the applicable distribution expenses continue to be reflected in the fund’s NAV, even if you make no further contributions. You may benefit from their assistance in selecting schemes, reviewing your holdings or managing transactions. However, the expense ratio alone cannot establish the quality of the assistance you receive.

SEBI’s move gives you clearer cost information before choosing a plan. You can then consider whether the distributor’s services suit your requirements and whether you prefer to invest directly. For your existing investments, 1 Finance Mutual Fund Commission Calculator⁠ can help you estimate the difference between your regular-plan investment value and what the corresponding direct plans could have accumulated. It uses historical NAV differences, allowing you to examine the financial effect of the two plans’ expense structures on your portfolio.

How much can the expense difference affect your returns over a longer period?

The industry-wide commission figure establishes the scale of distribution costs. To examine their effect on your investment, consider you invest a monthly SIP of ₹10,000 in the equity mutual fund for 20 years, without increasing your contribution.

We will further consider that the fund generates a nominal annual return of 10% before recurring expenses. Its direct plan has an assumed expense ratio of 0.5%, while the regular plan charges 1%. The additional 0.5 percentage points in the regular plan represents the difference in recurring expenses for this illustration.

For simplicity, the calculation subtracts the assumed annual expense ratios from the 10% return and compounds the resulting nominal returns monthly. Your contributions are invested at the end of each month. Actual fund expenses are reflected through daily NAV calculations, while market returns and expense ratios fluctuate.

Under these assumptions, your projected investment values would be:

You would invest the same ₹24 lakh in either plan, yet the direct plan would accumulate ~₹3.39 lakh more after 20 years. This difference arises from the additional recurring expenses in the regular plan and the subsequent returns forgone on those amounts.

The additional expenses also affect compounding. When a higher expense reduces your investment value in an earlier year, that amount is no longer available to participate in the fund’s returns during subsequent years. As the process continues, the difference between the two plans can widen.

Should you switch your existing regular mutual funds to direct plans?

If you already hold regular mutual funds, the difference in expense ratios may encourage you to consider switching. However, moving from the regular plan to the direct plan of the same scheme is generally treated as a redemption of your existing units followed by an investment in the direct plan.This can trigger capital gains tax. Depending on the scheme and the holding period of your units, an exit load may also apply.

Before making the change, examine the expected savings from lower future expenses against the tax and transaction costs involved. Your remaining investment horizon also affects how much benefit you could derive from the switch.

Or you can consult a Qualified Financial Advisor (QFA). He/she will review these costs to determine how much of your investment’s potential growth is being absorbed by recurring expenses and whether there is an opportunity to retain more of it.