Direct MF investors are growing ....what an IFA need to focus

The Indian mutual fund space has taken a record turnaround not only with new additions of clients' SIP amounts, but also with direct clients’ allocation.  The time has come when mutual fund advisors need to be careful about the transformation in business, which is coming up without any signal of risk as of now. It’s not the regular active funds competition with similar direct schemes. That should not be misunderstood while going through the topic of the article. We need to understand the underlying risks that might change the MFD’s business. The risk of online is growing, and now with AI, the risk goes multi-fold with TER coming down on new and old assets. MFDs need to be cautious.

Direct plans have clearly outpaced regular plans in terms of asset growth since March 2021, reflecting growing investor preference for cost-efficient mutual fund investing. In the coming years, we will find more growth for direct channels as passive industry, index funds, etf’s become a more integral part of investment decisions.

The compounded annual growth rate (CAGR) in average assets under management (AAUM) for direct investors stands at 21.74%, higher than the 18.13% CAGR for regular investors over the same period. Regular plans also expanded during the same period, from ₹22.12 lakh crore to ₹30.31 lakh crore, but the relative growth advantage remained with Direct investments.

Direct AAUM has climbed from about ₹14.6 lakh crore in March 2021 to nearly ₹39.0 lakh crore in March 2026, while regular AAUM has increased from about ₹17.6 lakh crore to roughly ₹40.4 lakh crore. This also reflects that the client has become mature, sophisticated in terms of investments irrespective the decision goes wrong in the choice of funds and investments. Thanks to the rapid growth of fintech platforms, robo-advisory services, and online mutual fund investment channels, which have led to the transformation of investment decisions for investors.  This growth helps to have fewer conversations on the basics of mutual fund investments and more of the advanced topics of investment objectives, long-term dreams, and plans.  

Index funds and passive investing have become a larger part of investors' portfolios, where the end user wants to ride the index journey rather than getting into active fund management. ETFs and Passive Funds recorded an impressive CAGR of 34.42% over the five years, compared to 16.14% CAGR for Active Funds. This sharp divergence highlights the increasing investor preference for low-cost, rule-based, and benchmark-linked investment strategies. EPFO allocations, corporate treasury investments, and large institutional mandates have significantly boosted ETF flows.

Most of this direct investment is from the Tier 1 cities, since Tier II and Tier III cities, where distributor-led advisory remains crucial for investors onboarding, trust-building, and financial handholding.

This also raises the questions of expense ratios and fees earned by a mutual fund distributor. This leads to the demand for goal-based investing, financial planning & behavioural investment planning. The asset management business and distribution are going through a transformation where both models of direct and regular will move simultaneously in the coming years.

The Indian mutual fund ecosystem is gradually moving toward a hybrid model where both channels coexist, but with increasing dominance of informed, digitally enabled, and cost-conscious Direct investors. This transition will redefine distribution economics and advisory models across the industry in the coming years. Mutual fund advisors must increasingly justify active fund recommendations through measurable alpha generation and portfolio outcomes, rather than relying solely on historical brand trust. This needs significant actions to be taken by the MFD’s to make a distinctive impression before AI gets into regular business revenue share.