In a bid to enhance transparency and protect mutual fund investors, the Securities and Exchange Board of India (SEBI) has introduced strict timelines for deploying funds raised through New Fund Offers (NFOs).

These new regulations, effective from April 1, 2025, will change how Asset Management Companies (AMCs) manage money collected from fresh fund launches.

Why has SEBI intervened?

NFOs have seen a sharp surge in the past year, with investors pouring over ₹1 lakh crore into 205 new fund launches in 2024 alone. Thematic and sectoral funds have been the primary drivers of this boom, collectively attracting nearly ₹68,000 crore.

However, this rapid growth has raised regulatory concerns. Many AMCs amassed large sums through NFOs but delayed deploying the funds into the market, sometimes leaving them idle for months while waiting for “better market opportunities.”

This practice poses two key risks:

Opportunity loss – Investors’ money remains uninvested, potentially affecting returns.

Mis-selling – Distributors may aggressively push NFOs without a clear deployment plan, leading to mismatches with the scheme’s stated investment objectives.

What do SEBI’s new rules say?

SEBI’s latest circular enforces a strict timeline for fund deployment:

• Funds raised in an NFO must be deployed within 30 business days from the date of unit allotment.
• If the AMC fails to meet this deadline, it can seek a one-time extension of another 30 business days—but only if the AMC’s Investment Committee (IC) approves it after reviewing the reasons for the delay.

If funds remain undeployed even after 60 business days, SEBI will require the AMC to:

• Stop accepting fresh inflows into the scheme until the funds are fully deployed.
• Allow investors to exit without any exit load (penalty-free withdrawal).
• Notify all investors via email/SMS about their right to exit without penalties.

Tightening mis-selling by distributors

To curb aggressive sales tactics, SEBI has also introduced new commission norms for mutual fund distributors. If an investor switches from an existing scheme to a new NFO, the distributor will earn the lower of the two commissions (between the old scheme and the NFO). This rule is aimed at discouraging distributors from pushing NFOs solely for higher commissions.

What is SEBI’s objective?

The new regulations are designed to ensure AMCs raise only as much money as they can deploy efficiently. This is particularly crucial for thematic and niche funds, where investment opportunities may be limited.

SEBI’s move also strengthens investor protection by providing a clear exit option if fund managers fail to invest their money within the stipulated time.

What happens next?

The framework takes effect on April 1, 2025, allowing AMCs and distributors time to adjust. In the meantime, the Association of Mutual Funds in India (AMFI) will issue detailed operational guidelines to ensure smooth compliance with SEBI’s rules.

Why does this matter to you as an investor?

For investors, these changes bring greater discipline to the NFO market. Funds will only be launched when AMCs have clear, executable investment plans, ensuring that money starts working immediately after investment. This is a step toward better fund governance and enhanced investor confidence in mutual fund offerings.