SEBI Makes Direct Plans Default on AMC Platforms: How Cost Mandates Shift MF Dynamics

In an operational transition that took effect on 1 November 2026, the Securities and Exchange Board of India altered how retail investors interact with mutual fund houses through electronic channels. Direct plans of mutual fund schemes are now mandated as the default option across all digital investment platforms, portals, and mobile applications operated by asset management companies.

The move, outlined by SEBI Chairman Tuhin Kanta Pandey during an address in Mumbai in late October, places scheme running costs squarely at the forefront of the investment decision. Under the revised framework, any investor who arrives at a fund house portal to start a systematic investment plan or execute a lump-sum transaction encounters the direct plan pre-selected on screen. If an investor consciously switches the selection to a regular plan, the digital platform must display an explicit notification informing them of the higher recurring expense ratio attached to the regular variant.

This regulatory intervention eliminates user interface defaults that previously steered unguided investors into higher-cost plans. At the same time, it establishes clearer boundaries between self-directed investing and distributor-intermediated engagement, reinforcing cost awareness across the Indian asset management industry.

The Dual Architecture of Mutual Fund Schemes

Mutual funds in India operate on a dual-plan structure that traces back to SEBI regulatory circulars issued in September 2012, which took effect on 1 January 2013. Under those regulations, every open-ended and close-ended mutual fund scheme is required to maintain two separate investment routes: a "direct plan" and a "regular plan".

Both plans share an identical underlying investment portfolio, follow the same investment objective, adhere to identical statutory asset allocation limits, and are run by the same fund manager. The divergence lies entirely in scheme operational accounting and distribution expenses.

In a regular plan, the asset management company deducts distribution costs, marketing overheads, and trail commissions payable to registered mutual fund distributors from the scheme corpus. These deductions form a component of the recurring "Total Expense Ratio" (TER). Because these costs are deducted daily from the scheme assets before arriving at the published Net Asset Value (NAV), a regular plan carries a higher TER and a systematically lower NAV than its direct counterpart over time.

In a direct plan, transactions take place between the investor and the fund house without intermediation. Distribution expenses and trail commissions are prohibited by law from being charged to direct plan unit holders. The resulting difference in net operating costs remains invested within the scheme portfolio, compounding to create a performance wedge across market cycles.

Eliminating Interface Inertia on AMC Portals

The primary rationale behind the mandate is the removal of interface friction and default inertia on manufacturer-owned platforms. Over the past decade, rapid smartphone adoption and digital onboarding mechanisms led millions of self-directed investors to open folios directly on AMC websites and smartphone applications.

However, operational practices on several fund house portals retained legacy defaults. Investors navigating an AMC platform without an intermediary often found regular plans pre-selected in drop-down menus. In some cases, investors holding historical distributor-coded folios had regular plans automatically set for incremental purchases, requiring them to uncheck pre-selected boxes to access the direct plan.

From a regulatory standpoint, when an investor independently navigates an asset management company portal, performs identity verification, selects a scheme, and remits capital without third-party assistance, routing that transaction into a regular plan created an institutional distortion. The investor incurred trail commission deductions embedded in the regular plan TER, even though no intermediary provided advice, portfolio curation, or physical service for that transaction.

By establishing direct plans as the mandatory default on AMC digital properties, SEBI has aligned portal defaults with actual user conduct. The investor who requires professional intermediation can still choose a regular plan, but doing so now requires an affirmative selection accompanied by an explicit disclosure of the cost differential.

Boundaries and Operational Scope of the Rule

The regulatory change is precise in its jurisdictional application. It applies strictly to the digital properties owned, managed, or hosted by asset management companies themselves.

The mandate does not apply to third-party distribution channels. Stockbroking platforms, independent financial distributor portals, institutional agency desks, and commercial bank mobile applications remain free to present regular plans as the standard path for their client base, because an intermediary relationship exists on those platforms.

Crucially, the regulation contains no retroactive mechanism. Existing systematic investment plans registered under regular plans do not automatically convert to direct plans. Similarly, accumulated holdings in regular folios remain untouched.

Converting historical regular plan units into direct plan units requires a distinct transaction known as a scheme switch. Because Indian tax jurisprudence treats a switch within the same scheme as a redemption followed by a fresh subscription, an automatic transition by regulatory fiat would have imposed unintended capital gains tax liabilities and potential exit loads on millions of investors.

The Mathematical Drag of Expense Ratios

The core issue underlying SEBI's portal intervention is the geometric effect of expense ratio differences over extended compounding periods. While an annual cost gap of 50 to 120 basis points appears modest in a single year, its cumulative effect over a multi-decade investing horizon is substantial.

In equity mutual fund categories—such as large-cap, flexi-cap, and mid-cap funds—the gap between direct and regular plan TER typically ranges between 0.70% and 1.30% per year. In hybrid and multi-asset schemes, the difference generally sits between 0.60% and 1.00%. In debt categories, such as liquid or short-duration funds, the spread is narrower, typically hovering between 0.15% and 0.40%.

To illustrate the arithmetic drag, consider an investor executing a monthly systematic investment plan of Rs. 10,000 over a 20-year horizon. Assuming a constant gross underlying portfolio return of 12% before expenses, a regular plan operating at a TER of 1.75% would deliver a net compounded annual return of 10.25%, yielding an accumulated corpus of approximately Rs. 75 lakh against total capital contributions of Rs. 24 lakh.

In contrast, a direct plan operating at a TER of 0.75%—a difference of 100 basis points—would deliver a net compounded return of 11.25%, producing a final portfolio value of approximately Rs. 84.5 lakh. The 100-basis-point operational variance translates to an absolute difference of roughly Rs. 9.5 lakh, or nearly 40% of the initial capital outlay, resulting entirely from compounding retained returns.

This cost wedge was highlighted in recent industry studies. AMFI-Crisil Factbook data published earlier this year noted that while direct plan penetration among individual retail investors rose from 21.4% in March 2021 to 36.7% by March 2026, over 63% of individual retail mutual fund assets remain deployed in regular plans. SEBI's mandatory disclosure requirement at the time of regular plan selection on AMC portals is intended to make this cost dynamic transparent at the exact moment of capital allocation.

The Operational Dilemma of Switching Existing Assets

While fresh investments initiated on AMC portals now default to direct plans, investors evaluating existing regular plan folios face operational frictions that prevent simple reassignment.

Under Section 45 of the Income Tax Act, 1961, any switch from a regular plan to a direct plan of the same scheme is classified as a transfer of a capital asset. Consequently, the transaction attracts capital gains tax:

For equity-oriented schemes, units held for 12 months or less attract short-term capital gains tax at 20%. Units held for longer than 12 months are classified as long-term capital assets, where aggregate annual gains exceeding Rs. 1.25 lakh are taxed at 12.5%.

For non-equity and fixed-income mutual fund schemes, gains are taxed according to the holding period rules and applicable individual income tax slab rates or capital gains provisions governing debt assets depending on their specific acquisition timeline.

In addition to capital gains taxation, schemes often enforce exit loads on units redeemed or switched out within specified holding windows, commonly 90 to 365 days in equity funds. Investors managing switches must therefore weigh the immediate tax outflow against the multi-year benefit of a reduced expense ratio. In many portfolios, executing a staggered systematic transfer over several financial years preserves the annual statutory exemption limit while progressively shifting the asset base to the lower-cost structure.

Structural Implications for Mutual Fund Distribution

The institutional impact of the 1 November mandate extends beyond portal interfaces into the commercial economics of mutual fund intermediation. For years, the distribution landscape has been navigating a progressive migration toward fee transparency and unbundled advisory.

The AMC portal mandate formalises a structural boundary: digital direct channels belong exclusively to self-directed capital, while regular plans belong to mediated networks where professional guidance is actively sought.

For mutual fund distributors, the default direct selection removes any residual flow of unassisted walk-in traffic from fund house websites. This clarifies the intermediary value proposition. Because basic execution is frictionlessly available at lower cost on every AMC app, distributors must justify regular plan commission trail deductions through comprehensive client servicing: financial goal planning, behavioral coaching during market downturns, asset rebalancing, and tax-efficient redemption management.

For the regulator, the change represents another step in a continuous disclosure agenda. It builds upon earlier directives requiring separate half-yearly expense disclosures for direct and regular plans, standardised colour-coded riskometers, and credit risk matrices. By placing direct plans at the default threshold and mandating cost notifications on AMC portals, SEBI has ensured that investor capital entering mutual funds directly is fully protected from inadvertent distribution deductions.