Direct Plan Adoption Trajectory in India
The direct plan in Indian mutual funds is a separate plan within each scheme available exclusively to investors who invest without any distributor or broker intermediary. Mandated by SEBI with effect from 1 January 2013, direct plans carry a lower total expense ratio (TER) than their regular plan equivalents because no distribution commission is embedded. The adoption of direct plans transformed the economics of mutual fund distribution, created a viable market for fee-based investment advisers, and enabled a generation of zero-commission digital platforms to acquire tens of millions of investors.
Background: the entry load era
Distributor commissions before 2009
Before 2009, Indian mutual funds charged an entry load of up to 2.25% of the invested amount on equity schemes. This load was passed on to the distributor as an upfront commission. The entry load model incentivised distributors to recommend frequent scheme switches (churning) because each new investment generated a fresh entry load. It also meant that investors who invested directly – without a distributor – still paid the same entry load, which was credited to the AMC rather than any adviser.
Entry load abolition (August 2009)
SEBI abolished entry loads effective 1 August 2009. Upfront commissions were no longer automatically embedded in the subscription amount. AMCs could pay distributors from the scheme’s ongoing expense ratio (trail commission) but could not deduct additional amounts at entry. This change reduced the commission available to distributors significantly and triggered a period of net outflows from equity schemes as distributor motivation declined.
Critically, the abolition created a logical anomaly: investors who invested without a distributor paid the same TER as those who invested through a distributor, even though no distribution service was being rendered. SEBI addressed this anomaly three years later.
Launch of direct plans (January 2013)
SEBI issued a circular on 13 September 2012 requiring all AMCs to introduce a separate direct plan within every existing and future scheme, effective 1 January 2013. Key provisions:
- The direct plan would have a distinct net asset value (NAV) from the regular plan.
- The direct plan TER would be lower than the regular plan TER by the exact amount of the distribution commission embedded in the regular plan.
- Investors who invest directly through the AMC’s own website, AMC branch, or through SEBI-registered investment advisers (RIAs) qualified for the direct plan.
- Investments through brokers, distributors, banks, national distributors, or any entity holding an ARN (AMFI Registration Number) were required to use the regular plan.
TER differential: the economic case for direct
The TER differential between direct and regular plans varies by category:
| Scheme category | Typical regular plan TER | Typical direct plan TER | Approximate annual saving |
|---|---|---|---|
| Large-cap equity | 1.50-1.75% | 0.80-1.00% | 0.70-0.75% |
| Mid/small-cap equity | 1.75-2.00% | 1.00-1.25% | 0.75-0.90% |
| Flexi-cap/multi-cap | 1.60-1.85% | 0.90-1.10% | 0.70-0.80% |
| ELSS | 1.50-1.75% | 0.80-1.00% | 0.65-0.75% |
| Hybrid/balanced advantage | 1.50-1.75% | 0.80-1.00% | 0.65-0.75% |
| Index fund (large-cap) | 0.40-0.50% | 0.10-0.20% | 0.20-0.30% |
| Liquid / overnight | 0.25-0.35% | 0.15-0.20% | 0.10-0.15% |
Source: SEBI TER regulations and AMC factsheets (approximate ranges, FY2024-25).
The compounding impact over long holding periods is substantial. An investor holding a Rs 10 lakh equity corpus for 20 years at 12% gross return would accumulate approximately Rs 15 lakh more in a direct plan versus a regular plan (assuming a 0.70% annual TER differential), purely from the compounding effect of lower costs.
Adoption trajectory
Phase 1: Slow start (2013 to 2017)
Initial direct plan adoption was concentrated among:
- Corporate treasuries, which used direct plans for liquid and short-duration debt funds. Corporate treasury mandates are typically large (Rs 10 crore and above), making the TER saving on an absolute rupee basis material.
- High-net-worth individuals transacting through AMC websites or early online platforms.
- SEBI-registered investment advisers (RIAs), a fledgling category whose fee-based model was compatible with direct plans.
Retail investor adoption was limited. Most individual investors continued to transact through banks, IFAs, and national distributors (NJ India, Prudent Corporate, and others) who operated on the regular plan.
By March 2016, direct plan AUM was estimated at approximately Rs 3-4 lakh crore out of a total industry AUM of Rs 13 lakh crore – roughly 25-30%, with corporate treasury mandates comprising the dominant share.
Phase 2: Online platform acceleration (2017 to 2021)
The launch and rapid scaling of zero-commission, direct plan-only platforms radically changed the retail landscape:
- Zerodha Coin (launched 2017): Integrated with Zerodha’s equity brokerage, enabling existing equity traders to add direct plan mutual funds.
- Kuvera (launched 2017): The first dedicated direct plan SIP platform with goal-based investing features.
- Groww (launched 2016, MF feature 2018): Became the largest platform by account count through aggressive customer acquisition.
- Paytm Money (launched 2018): Leveraged Paytm’s 350-million-user base for distribution.
- ET Money / INDmoney: Financial wellness platforms that incorporated direct plan investing.
These platforms collectively acquired over 50 million users by 2022, the vast majority investing in direct plans through SIPs.
Phase 3: Majority and maturity (2021 to 2026)
By FY2022-23, direct plan AUM crossed the 50% threshold of total industry AUM for the first time, driven by:
- Continued growth in corporate treasury direct plan holdings.
- Maturing AUM from direct plan SIPs started in 2018-20 that had compounded over several years.
- RIA-advised assets, which SEBI estimated at approximately Rs 5-7 lakh crore by 2024.
As of March 2025, direct plan AUM was estimated at approximately Rs 38-40 lakh crore out of a total industry AUM of Rs 67 lakh crore – a direct plan share of approximately 57-60%.
Direct plan investors: composition
Corporate treasuries
Corporate treasury mandates constitute the largest single component of direct plan AUM by absolute value, but a small fraction of account count. Large corporates and PSUs invest in liquid, overnight, ultra-short, and short-duration debt funds via direct plans. The investment ticket sizes range from Rs 10 crore to Rs 10,000 crore per transaction, making the TER saving meaningful even for a 0.10-0.15% differential.
SEBI-registered investment advisers
SEBI created the Registered Investment Adviser (RIA) category under the Investment Advisers Regulations, 2013. RIAs are prohibited from receiving commissions from AMCs and must charge fees directly to clients. Their client transactions are routed through the direct plan. The RIA ecosystem grew from approximately 1,000 registered entities in 2015 to over 1,400 by 2025, with fee-only advisory becoming a recognised profession.
Digital platform retail investors
Online direct platforms serve the long tail of small-ticket SIP investors. The average direct plan SIP ticket on platforms like Groww is Rs 1,500-2,500 per month. These investors are predominantly in the 22-35 age bracket, first-generation mutual fund investors, and concentrated in equity and hybrid categories.
Regulatory evolution
SEBI made several regulatory adjustments to the direct plan framework between 2013 and 2026:
- 2018: Differentiation of expense ratio slabs by AUM size, compressing TERs for large schemes. This effectively reduced the regular-direct differential in absolute terms but maintained it in percentage terms.
- 2020: SEBI directed AMCs to clearly label all investor communications and account statements with whether the holding was in the direct or regular plan, to improve investor awareness.
- 2022: SEBI introduced the concept of execution-only platforms (EOPs) that could route transactions in both regular and direct plans subject to specific conditions, modifying the previously rigid intermediary classification.
- 2023: SEBI harmonised the TER disclosure norms, requiring AMCs to publish direct vs regular plan expense ratios on their websites in a standardised format.
Impact on the distribution ecosystem
The direct plan structure created a two-tier distribution ecosystem:
Tier 1 – Advisory model: Fee-based RIAs and advisory platforms that earn no commissions and are aligned to client outcomes. Their assets are in the direct plan.
Tier 2 – Transactional model: Banks, IFAs, national distributors, and online regular-plan platforms that earn trail commissions (typically 0.50-1.00% annually on equity AUM) from AMCs. Their assets are in the regular plan.
The competitive tension between these tiers has intensified. Bank-led distribution and IFA-led distribution have defended their position by emphasising behavioural coaching, relationship management, and financial planning services that justify the fee. The open architecture model enables both tiers to coexist within the same distribution network.
Criticism and limitations
Direct plans have been criticised on the following grounds:
- No advice included. Investors who invest in direct plans without professional guidance risk making inappropriate scheme choices, incorrect asset allocation decisions, and panic-driven redemptions.
- Complexity for unsophisticated investors. Comparing schemes across 44 AMCs and multiple categories requires financial literacy and time.
- Platform dependency. Investors relying on fintech platforms for direct plan access face platform-specific risks (regulatory compliance, technology reliability, platform shutdowns).
SEBI has acknowledged these concerns and has attempted to promote a hybrid model in which fee-based advisers provide advice while clients transact directly in direct plans.