Mutual Fund Direct Plans Default on AMC Platforms From 1 November

Direct plans will be the pre-selected option on the websites and apps of mutual fund houses from 1 November, SEBI chairman Tuhin Kanta Pandey said at NDTV Profit IGNITE in Mumbai on 28 October. “From November 1, Direct Plans will be the default option on digital platforms of AMCs,” he said, adding that investors who still pick a regular plan must be told about its higher expense ratio.

A Warning Before You Pick a Regular Plan

An investor opening a fund house’s own site or app will see the direct plan already selected. Choosing a regular plan, which pays a distributor commission, will bring up a notice that its expenses are higher. Business Today gives an example: a regular plan charging 0.5 percentage points more costs about ₹2,500 a year extra on a ₹5 lakh investment, if the value stays the same.

The change covers new investments made through AMC digital platforms. Reports so far do not say it applies to brokers, distributors or other third-party apps, and existing regular-plan holdings and SIPs are not converted automatically.

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Switching Can Trigger Tax and Exit Load

Moving an existing holding from a regular to a direct plan is treated as a redemption and a fresh purchase. That can attract capital gains tax and, in some schemes, an exit load. Investors who rely on a distributor for advice, rebalancing or paperwork would lose that service by going direct.

Direct and regular plans of the same scheme hold the same portfolio; the difference is the commission built into the regular plan’s expense ratio, which lowers its returns over time. Other SEBI moves on mutual fund costs are in IPB News’s Daily Updates.

Circular Text Still Awaited

SEBI’s circular number and date were not cited in the reports available on Friday morning, and the exact wording of the regular-plan notice is not public. Fund houses are expected to change their sites and apps before the rule starts on 1 November.

Source: Based on reporting by Business Today, CAclubindia and Angel One.

Image: Wikimedia Commons.