SEBI Now Forces Funds to Show Direct-vs-Regular Costs Side by Side - and Adds Colour to the Riskometer

On 5 November 2024, the Securities and Exchange Board of India (SEBI) issued circular SEBI/HO/IMD/PoD1/CIR/P/2024/150, titled "Disclosure of expenses, half yearly returns, yield and risk-o-meter of schemes of Mutual Funds". It settles a question that has quietly cost long-term investors lakhs of rupees: are you really seeing what a Regular Plan charges you versus what a Direct Plan does not? Because distribution commission cannot be charged to a Direct Plan, its expense ratio is structurally lower, and from this circular AMCs must now disclose total recurring expenses, half-yearly returns and compounded annualised yield separately for the Direct and Regular variants of the same scheme.

The same circular does a second thing. Section B modifies the SEBI Master Circular for Mutual Funds (SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/90 dated 27 June 2024) to require that the six-level Risk-o-meter be depicted using a prescribed colour scheme, so that the jump from one risk band to the next is visible at a glance rather than buried in identical grey needles. Two disclosures, one document, both aimed at the same failure: investors picking a plan or a scheme without seeing the number that actually decides their outcome.

This guide compares the Direct Plan and the Regular Plan of the same mutual fund scheme for a cost-conscious, long-horizon investor. The two variants hold the identical portfolio and the same net asset value methodology; the only structural difference is the expense ratio, and over 20 years that single line makes a difference measured in lakhs. Every figure below is drawn from SEBI circulars or the Income Tax Act; the return assumptions are labelled as illustrations, not fund performance.

Side-by-Side Comparison

A Direct Plan is bought straight from the AMC or through SEBI-registered platforms that take no commission; a Regular Plan is routed through a distributor who is paid a trail commission out of the scheme's expenses. SEBI (Mutual Funds) Regulations, 1996, Regulation 52(6) caps the maximum total expense ratio of an open-ended equity scheme at 2.25% for the first Rs 500 crore of daily net assets, tapering as assets grow. Within that ceiling, the Direct Plan's ratio excludes distribution and commission costs, which is why the November 2024 circular insists the two ratios be printed side by side.

The reason the circular matters is compounding. Consider a one-time investment of Rs 10,00,000 held for 20 years, and assume a gross return of 12% a year before costs purely to isolate the effect of the expense ratio. This 12% is an assumption for a cost comparison; it is not any fund's actual return, and past performance of a benchmark index is never guaranteed. Subtract the expense ratio from the gross return, and the net compounded outcomes diverge sharply.

On these assumptions, a Regular Plan carrying an expense ratio 1.25 percentage points higher than the Direct Plan surrenders Rs 17.81 lakh over 20 years on a single Rs 10,00,000 investment. You can run your own horizon and contribution on the lumpsum calculator or, for monthly investing, the SIP calculator; for a tax-saving equity scheme, the ELSS calculator applies the same logic to a three-year lock-in. The distributor's trail is not a scam - it pays for advice and hand-holding - but from November 2024 you are entitled to see exactly what it costs before you decide whether that service is worth 1 percentage point a year of compounding.

The Six-Level Risk-o-meter Now Carries a Prescribed Colour Scheme

Section B of the 5 November 2024 circular addresses a separate blind spot. Since 2021, every scheme has carried a six-level Risk-o-meter - Low, Low to Moderate, Moderate, Moderately High, High, and Very High - recalculated monthly from the portfolio's characteristics. The problem was legibility: the six needles all looked alike, so a reader could not tell at a glance whether a fund sat at level two or level five. The November 2024 circular fixes this by mandating that the six levels be depicted using a prescribed colour scheme, turning an abstract needle position into an immediate visual signal.

The colour requirement matters because the Risk-o-meter is not static: SEBI's framework requires it to be evaluated every month and any change communicated to unit-holders. A scheme that reads "Moderately High" in one disclosure can move to "High" the next month if its portfolio shifts, and the prescribed colour makes that migration obvious rather than something you notice only after reading two 40-page factsheets back to back. Read alongside the separated Direct-versus-Regular expense data, the two changes let you weigh cost and risk from the same document for the first time.

Tax Treatment

Switching from a Regular Plan to a Direct Plan is not a costless housekeeping move: in law it is a redemption of the Regular Plan units followed by a fresh purchase of Direct Plan units, and that redemption is a transfer that triggers capital gains tax. So the tax rules below are not a side note to the plan decision - they are part of it. The rates for equity-oriented schemes (those holding at least 65% in domestic equity) follow Sections 111A and 112A of the Income Tax Act as amended by the Union Budget 2024, effective 23 July 2024.

The Rs 1,25,000 annual LTCG exemption applies across all your Section 112A equity gains combined, not per scheme, and long-term gains above it are taxed at 12.5% without indexation. For units that are not equity-oriented, the position is different: units of a "specified mutual fund" acquired on or after 1 April 2023 are brought under Section 50AA by the Finance Act 2023, so their gains are treated as short-term and taxed at your slab rate regardless of how long you hold them, with no indexation and no 12.5% concessional rate. Verify the section text on the government portal at incometax.gov.in before filing, because the equity-versus-debt classification decides the entire outcome.

The practical takeaway for the plan decision is timing. If you move a Regular Plan holding to its Direct twin after less than 12 months, the redemption is an STCG event taxed at 20%; hold past the 12-month mark and you convert it into an LTCG event at 12.5% with the Rs 1,25,000 shield. On a large switch this timing can outweigh a year of the expense-ratio saving, so the two decisions - which plan, and when to move - must be run together, ideally against the numbers on the lumpsum calculator.

Who Should Pick Which

The Direct Plan suits the self-directed investor who is comfortable choosing schemes, reading the monthly Risk-o-meter, and rebalancing without a distributor's prompt. For this investor the roughly 0.5% to 1 percentage point a year saved on the expense ratio compounds directly into returns, and on the Rs 10,00,000, 20-year illustration above that saving was worth between Rs 11.14 lakh and Rs 17.81 lakh. If you already track your portfolio and use tools such as the SIP calculator to plan contributions, the Regular Plan's embedded commission is buying you a service you are not using.

The Regular Plan earns its 1-percentage-point cost when the distributor genuinely changes behaviour: stopping a panic redemption in a drawdown, keeping a systematic investment plan running through a bad year, or steering a first-time investor away from a Very High Risk-o-meter thematic fund they did not understand. Behaviour gaps of a few percentage points a year are common among investors who exit at the wrong time, and if a distributor closes that gap the 1% is cheap. The point of the November 2024 disclosure is not to push everyone into Direct - it is to make the price of that service explicit so you can judge it.

A workable middle path is a fee-only SEBI-registered investment adviser (RIA), who charges a transparent fee and recommends Direct Plans, separating the advice you pay for from the commission you do not. Whichever route you choose, use the newly separated disclosures: compare the Direct and Regular expense ratios of the exact same scheme, read the colour-coded Risk-o-meter for its current level, and confirm the tax character of your units before switching. The circular has finally put all three numbers - cost, risk and the plan you hold - on the same page.

FAQ

What exactly does the SEBI circular of 5 November 2024 change?

Circular SEBI/HO/IMD/PoD1/CIR/P/2024/150 requires AMCs to disclose total recurring expenses, half-yearly returns and compounded annualised yield separately for the Direct and Regular Plan of every scheme, because the Direct Plan cannot be charged distribution commission. It also amends the 27 June 2024 Master Circular to require the six-level Risk-o-meter to be shown in a prescribed colour scheme.

How much can the Direct Plan actually save me?

On an illustrative Rs 10,00,000 held for 20 years at an assumed 12% gross return, a Direct Plan with a 0.50% expense ratio grew to Rs 88.2 lakh, while a Regular Plan at 1.75% reached only Rs 70.4 lakh - a gap of Rs 17.81 lakh. The exact saving depends on your own expense-ratio difference and horizon, which you can model on the lumpsum and SIP calculators.

Is the portfolio different between Direct and Regular Plans?

No. The Direct and Regular variants of a scheme hold the identical portfolio and share the same NAV calculation methodology; only the expense ratio differs, because Regulation 52 of the SEBI (Mutual Funds) Regulations, 1996, allows distribution commission in the Regular Plan but not the Direct Plan.

Will I pay tax if I switch from a Regular Plan to a Direct Plan?

Yes. A switch is legally a redemption plus a fresh purchase, so it triggers capital gains on the units redeemed. For an equity-oriented fund held under 12 months the gain is STCG taxed at 20% under Section 111A; held 12 months or longer it is LTCG taxed at 12.5% under Section 112A, with the first Rs 1,25,000 a year exempt.

What does the colour on the Risk-o-meter mean?

The six levels run from Low to Very High and are recalculated every month from the scheme's portfolio. The 5 November 2024 circular requires each level to be shown in a prescribed colour so the risk band, and any monthly change in it, is visible at a glance rather than hidden in a needle position that looks the same as its neighbours.

Do these rules apply to ELSS and other tax-saving funds too?

Yes. ELSS is an equity-oriented scheme and carries both a Direct and a Regular Plan, so the separated expense and return disclosure applies. The three-year lock-in does not change the tax rates - gains after the lock-in are LTCG at 12.5% over the Rs 1,25,000 exemption - and you can model the outcome on the ELSS calculator.