SEBI's New Mutual Fund Rule from November 2026: Direct Plans Take Centre Stage

Introduction

Mutual fund investors often focus on returns, fund ratings and investment performance. However, one important factor that can influence long-term wealth creation is the expense ratio charged by a mutual fund scheme.

In an important development for the mutual fund industry, the Securities and Exchange Board of India (SEBI) has announced that Direct Plans will become the default option on the digital platforms of Asset Management Companies (AMCs) from 1 November 2026.

Investors choosing Regular Plans will be informed about the higher expense ratios associated with them.

The development is aimed at improving transparency and ensuring that investors understand the cost implications of their investment choices.

1. What Has SEBI Announced?

According to the announcement made by SEBI Chairman Tuhin Kanta Pandey on 28 October 2026, Direct Plans will become the default option on AMC digital platforms from 1 November 2026.

Investors who wish to invest through Regular Plans will be informed about their higher expense ratios.

The objective is to make the cost difference between the two investment options more visible and help investors make informed decisions.

Importantly, this does not mean that Regular Plans are being discontinued. Both investment options will continue to be available, subject to the applicable framework.

2. Understanding Direct Plans and Regular Plans

Mutual fund schemes generally offer two investment options: Direct and Regular.

Although both options invest in the same underlying portfolio of securities within a scheme, their expense structures differ.

Direct Plan

A Direct Plan is purchased directly from the mutual fund house without involving a distributor.

Key features include:

• No distributor commission is included in the plan's expense ratio.
• It generally has a lower expense ratio.
• Investors are responsible for selecting and managing their investments.
• It may be suitable for investors who are comfortable making their own investment decisions.

Regular Plan

A Regular Plan is purchased through a mutual fund distributor or intermediary.

Its features include:

• Distributor commission is included in the expense structure.
• It generally has a higher expense ratio than the corresponding Direct Plan.
• Investors may receive assistance from distributors in selecting and servicing investments.
• It may be suitable for investors who value professional guidance and ongoing assistance.

3. Why Does the Expense Ratio Matter?

The expense ratio represents the annual cost charged by a mutual fund scheme for managing its operations and investments. It is reflected in the scheme's Net Asset Value (NAV).

Even a seemingly small difference in expense ratios can influence investment outcomes over a long period.

Consider a hypothetical illustration:

An investor invests ₹10 lakh for 15 years and earns an assumed annual gross return of 12%.

The difference is approximately ₹2.8 lakh.

This illustration demonstrates how costs can affect long-term investment value. Actual returns, expense ratios and investment outcomes will vary.

4. Does Direct Plan Always Mean a Better Choice?

Not necessarily.

A lower expense ratio is an important consideration, but it should not be the only factor influencing an investor's decision.

Investors should also evaluate:

• Their understanding of mutual fund products.
• Their ability to assess investment risk.
• Their financial goals and investment horizon.
• Their need for professional guidance.
• The quality of services they receive from an intermediary.

For investors who require regular assistance with financial planning and investment-related decisions, a Regular Plan may provide value through distributor support.

The appropriate choice depends on the investor's requirements and the services they need.

5. What Should Existing Mutual Fund Investors Do?

The announcement provides an opportunity for investors to review their existing mutual fund portfolios.

Some practical steps include:

1. Check whether investments are held under Direct or Regular Plans.
2. Compare the expense ratios of the corresponding plans.
3. Understand the services received through the distributor, if applicable.
4. Review whether the existing investment structure matches financial goals.
5. Consider tax implications and exit loads before switching between plans.

Investors should remember that switching from a Regular Plan to a Direct Plan is generally treated as redemption from one plan and investment into another for tax purposes. Applicable capital gains tax and exit load conditions should therefore be examined before making a decision.

6. What Does This Mean for Mutual Fund Distributors?

The regulatory development also has implications for mutual fund distributors.

As investors become more aware of the cost differences between Direct and Regular Plans, distributors may need to place greater emphasis on the value of their services.

The focus may increasingly shift towards:

• Financial education.
• Investor servicing.
• Goal-based investment assistance.
• Portfolio review and support.
• Transparent communication of costs and commissions.

The development could encourage a more transparent and service-oriented mutual fund distribution ecosystem.

7. Broader Implications for the Mutual Fund Industry

SEBI's announcement reflects a broader regulatory emphasis on investor awareness, transparency and informed decision-making.

Making Direct Plans the default option on AMC digital platforms may encourage investors to pay closer attention to investment costs.

At the same time, it reinforces the importance of understanding the difference between investment products and the services associated with them.

For AMCs and distributors, clear communication about costs, services and investment options will remain essential.

Conclusion

SEBI's decision to make Direct Plans the default option on AMC digital platforms from 1 November 2026 is an important development for India's mutual fund industry.

The change is not about eliminating Regular Plans. Rather, it is about making investors more conscious of the costs associated with their investment choices.

A lower expense ratio can support better long-term outcomes, but the right investment decision should always consider the investor's financial goals, risk appetite and need for guidance.

The real objective of investing is not simply to minimise costs, but to make informed decisions that support long-term financial well-being.

The author is associated with HKC Chartered Accountants & Business Advisors, providing professional support in audit, taxation, corporate compliance and business advisory.