SEBI Chief Asks Investors To Be Cautious While Buying Direct Mutual Funds

Investing in mutual funds online could soon come with a different starting point. From November 1, direct plans will be the default option on the digital platforms of asset management companies (AMCs), Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey said at NDTV Profit Ignite on Wednesday.

Investors who opt for regular plans should be informed about their higher expense ratio while those who go for direct plans need to choose cautiously, he said. Notably, the plan (direct or regular) an investor chooses can affect how much they pay in fees over time. 

Meanwhile, the SEBI chief also said that making investing easier is only half the job. Investors must also understand what they are buying, what it costs and what risks they are taking. “Easy access does not guarantee understanding,” Pandey said.

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Direct vs Regular Mutual Funds: What It Means

Direct and regular plans invest in the same mutual fund scheme and have the same portfolio. The key difference is distribution costs.

Direct plans are bought without a distributor or intermediary earning a commission from the investment. Regular plans are purchased through distributors, whose commissions are reflected in the scheme's expenses.

As a result, direct plans generally have a lower expense ratio (the annual cost of running a mutual fund). Regular plans typically cost more because they include distribution expenses. This difference can affect long-term returns. Even a small annual cost difference can add up over several years as an investment grows.

However, a direct plan is not automatically the right choice for everyone. Investors who need help selecting funds, planning their investments or managing their portfolios may value professional advice. They should understand what that service costs and whether it is suitable for their needs.

The new default does not remove that choice. Instead, it puts direct plans first on AMC digital platforms and requires investors choosing regular plans to be informed about the higher expense ratio.

More Indians Are Investing, But Knowledge Remains A Concern

Pandey also pointed to a gap between awareness of financial products and actual participation in the securities market. According to the SEBI investor survey he cited, 63 per cent of households knew of at least one securities market product, but only around 9.5 per cent participated. Even among investors, just 36 per cent had moderate or high knowledge of the market.

The figures underline a challenge for a country where investing has become easier through mobile apps and systematic investment plans (SIPs), which allow people to invest a fixed amount regularly.

A simple digital process, however, does not guarantee that someone understands a fund's risks, fees or suitability for their financial goals. “Investing must be a choice made with open eyes, knowing what you buy, what it costs, and what you risk,” Pandey said.

For ordinary investors, that means looking beyond past returns or popular recommendations. They should understand the fund's investment objective, the level of risk involved, its costs and how it fits into their financial plans.