A familiar case in practice: a salaried investor with eleven years of SIPs, all bought through a relationship manager at his bank, all in regular plans. Nobody told him what he was paying, and the statement does not shout it either. It sits in one line: the expense ratio.
His question is reasonable. "It is under 1%. Does it really matter?"
It does, because of where the charge is applied. The expense ratio is not a slice of your profit. It is deducted from the entire value of your holding, every day, for as long as you stay invested. A small percentage of a growing number is not a small number for very long.
# What the gap actually is
Since 1 January 2013, every mutual fund scheme has had to offer a separate plan for direct investment. SEBI's circular of September 2012 required it to carry "a lower expense ratio excluding distribution expenses, commission, etc." with no commission paid from it, and a separate NAV.
So the two plans of one scheme hold the same portfolio, run by the same fund manager. The regular plan simply has one more cost inside it: the trail commission paid to whoever sold you the fund. That commission is the gap.
# What changed in 2026
SEBI notified the SEBI (Mutual Funds) Regulations, 2026 in January 2026, replacing the 1996 regulations, with the new expense framework applying from 1 April 2026. Three points matter for this discussion:
- The old "total expense ratio" ceiling has been replaced by a base expense ratio (BER) ceiling. Statutory levies such as GST, STT, stamp duty and exchange and SEBI fees now sit outside the BER and are charged at actuals.
- The BER ceilings are lower than the old TER ceilings. For example, index funds and ETFs are capped at 0.90% (earlier 1%), and the cap on the smallest AUM slab of an open-ended equity scheme has come down from 2.25% to 2.10%, with further reductions across higher slabs.
- The extra 0.05% that funds were allowed to charge on schemes with an exit load has been removed.
None of this removed regular plans, and none of it removed the rule that direct plans exclude distribution costs. So when you compare two plans of the same scheme now, look at the BER of each. The difference is still, in substance, the distributor's share.
# The compounding maths
Here are the assumptions. None of these is a forecast.
- The direct plan earns 12% a year, after its own expenses.
- The regular plan of the same scheme earns 12% minus the gap, because the portfolio is identical and only the extra commission differs.
- Gaps tested: 0.50%, 0.75% and 1.00%.
- SIP of ₹10,000 invested at the start of each month; returns compounded monthly at the equivalent of the annual rate. Lump sum of ₹10 lakh invested once.
- Tax ignored in these first two tables, since both plans are taxed the same way on exit.
# ₹10,000 a month SIP
| Years | Total invested (₹) | Direct plan at 12% (₹) | Regular, gap 0.50% (₹) | Regular, gap 0.75% (₹) | Regular, gap 1.00% (₹) |
|---|---|---|---|---|---|
| 10 | 12,00,000 | 22,40,359 | 21,81,514 | 21,52,705 | 21,24,297 |
| 15 | 18,00,000 | 47,59,314 | 45,60,559 | 44,64,551 | 43,70,720 |
| 20 | 24,00,000 | 91,98,574 | 86,60,495 | 84,04,212 | 81,56,072 |
What the regular plan leaves behind, in rupees and as a share of the direct-plan corpus:
| Years | Gap 0.50% | Gap 0.75% | Gap 1.00% |
|---|---|---|---|
| 10 | ₹58,845 (2.6%) | ₹87,654 (3.9%) | ₹1,16,061 (5.2%) |
| 15 | ₹1,98,754 (4.2%) | ₹2,94,763 (6.2%) | ₹3,88,594 (8.2%) |
| 20 | ₹5,38,078 (5.8%) | ₹7,94,361 (8.6%) | ₹10,42,501 (11.3%) |
Look at the 20-year row with a 1% gap. You put in ₹24 lakh. The difference at the end is more than ₹10 lakh, which is over 40% of everything you contributed.
# ₹10 lakh lump sum
| Years | Direct plan at 12% (₹) | Regular, gap 0.50% (₹) | Regular, gap 0.75% (₹) | Regular, gap 1.00% (₹) |
|---|---|---|---|---|
| 10 | 31,05,848 | 29,69,947 | 29,04,024 | 28,39,421 |
| 15 | 54,73,566 | 51,18,268 | 49,48,804 | 47,84,589 |
| 20 | 96,46,293 | 88,20,584 | 84,33,355 | 80,62,312 |
| Years | Gap 0.50% | Gap 0.75% | Gap 1.00% |
|---|---|---|---|
| 10 | ₹1,35,901 (4.4%) | ₹2,01,824 (6.5%) | ₹2,66,427 (8.6%) |
| 15 | ₹3,55,298 (6.5%) | ₹5,24,761 (9.6%) | ₹6,88,976 (12.6%) |
| 20 | ₹8,25,709 (8.6%) | ₹12,12,938 (12.6%) | ₹15,83,982 (16.4%) |
The lump sum suffers more than the SIP in percentage terms for a simple reason: all of the money is exposed to the gap for all 20 years. In an SIP, the last instalments are exposed for only a few months.
# The case for paying the commission
I would be misleading you if I stopped at the table.
The single most expensive investor behaviour I see is not a high expense ratio. It is stopping an SIP in a falling market, or redeeming in a panic and coming back after the recovery. A single panic exit near a market bottom can cost more than many years of expense-ratio gap.
If a distributor genuinely does these things for you, the commission is buying something:
- Keeps you invested when every instinct says sell.
- Rebalances your asset allocation instead of letting equity drift to 85%.
- Handles nominations, KYC, transmission after a death and the paperwork that families often leave undone.
- Maps funds to goals and dates, not to last year's top performers.
The honest test is to write down what you actually received in the last three years. If the answer is two phone calls, both pitching an NFO, you are paying for advice you are not getting.
There is also a middle route. You can invest in direct plans and pay separately for advice, from a SEBI-registered investment adviser who charges a fee and does not earn commission. Whether that fee is cheaper than the gap depends on your corpus. On a small portfolio, the commission may cost less than a flat fee. On a large one, it rarely does.
# Switching from regular to direct: it is a sale
This is where people get caught. Moving from the regular plan to the direct plan of the same scheme is not a free internal transfer. Your regular units are redeemed and direct units are bought. For tax purposes that is a transfer of a capital asset, and exit load applies if you are inside the load period.
For an equity-oriented fund held more than 12 months, the gain is long-term and taxed at 12.5% above the ₹1.25 lakh annual exemption, plus 4% cess. Short-term gains are taxed at 20%. Debt fund units bought after 1 April 2023 are taxed at your slab rate regardless of holding period. The full rules are in our mutual fund taxation guide and STCG vs LTCG explainer.
# A worked switch
Assume a regular equity fund holding worth ₹14 lakh, bought for ₹10 lakh, held over a year, no other capital gains in the year, gap of 0.75%, and the same 12% direct-plan return as above.
- Gain: ₹4,00,000. Taxable after the ₹1.25 lakh exemption: ₹2,75,000.
- Tax at 12.5% plus 4% cess: ₹35,750.
- If a 1% exit load applied: exit load ₹14,000, and tax falls to ₹33,930 because the gain is smaller.
Now compare two paths, each fully redeemed (and taxed) at the end of the period: stay in regular, or switch today and reinvest what is left in direct.
| Years after switching | Switch advantage, no exit load | Switch advantage, with 1% exit load |
|---|---|---|
| 0 (day of switch) | ₹0 | –₹12,180 |
| 1 | ₹21,653 | ₹8,201 |
| 3 | ₹37,803 | ₹21,332 |
| 5 | ₹63,454 | ₹43,195 |
| 7 | ₹1,02,303 | ₹77,294 |
Two things explain why the switch pays back so quickly. First, the tax you pay on switching is mostly tax you would have paid on exit anyway; you are paying it earlier, not paying it extra. Second, the ₹1.25 lakh exemption resets every financial year, so realising gains now uses an exemption that would otherwise lapse. The exit load, on the other hand, is a pure cost.
This comparison assumes you would eventually redeem. If a holding is meant to pass to the next generation untouched, the calculation is different and worth doing properly.
# Check what your portfolio is really earning
Most people discover the gap only when they compare their statement to a friend's. The cleaner method is to calculate the return on your own cash flows.
An SIP has dozens of dated investments, so a simple percentage gain or a CAGR misstates it. XIRR is the right measure, and our XIRR vs CAGR guide walks through why. Run the XIRR for your regular plan, then look up the direct plan's NAV history for the same dates. The difference between the two XIRRs is what the commission has cost you so far.
If you are sizing a retirement or education goal, the gap belongs inside that projection, not outside it. The goal-based investing framework and retirement corpus guide show where a 0.75% drag on returns changes the monthly amount you need to save.
# What I would tell him
Start every new SIP in the direct plan from next month. Move the old regular units across financial years, keeping each year's gains within the exemption, and leave anything under exit load alone until it clears. And if he wants someone to stop him from panic-selling, pay for that explicitly and know the price.
He does not need a new fund. He needs to stop paying for a service he has never used.
See what your mutual funds are actually earning after costs. VittSphere ONE calculates XIRR on your real SIP dates and shows every fund alongside the rest of your net worth, and ARTHA can walk you through the tax on a regular-to-direct switch in plain Hinglish or English. Start free →
# References (verified 23 September 2026)
- SEBI circular CIR/IMD/DF/21/2012 (13 September 2012): separate plan for direct investments
- SEBI: Securities and Exchange Board of India (Mutual Funds) Regulations, 2026 (January 2026)
- Business Standard: SEBI overhauls mutual fund expense rules (18 December 2025)
- Cafemutual: SEBI's new expense ratio framework, what changes after 1 April 2026
Disclaimer: This article is educational and general in nature and is not investment advice. VittSphere ONE is not a SEBI-registered Investment Adviser or Research Analyst and does not recommend any specific mutual fund, AMC or distributor. All return figures above are illustrative, computed on stated assumptions (12% direct-plan return, fixed expense-ratio gaps, no change in tax law), and are not a forecast; actual returns and expense ratios vary by scheme and over time. Tax figures assume a resident individual with no other capital gains in the year and ignore surcharge. Check your scheme's current expense ratio and exit load, and consult a qualified adviser or CA before switching. Data verified 23 September 2026.
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