The Securities and Exchange Board of India (SEBI) has announced new reforms aimed at protecting mutual fund investors in New Fund Offers (NFOs). These changes, approved on December 19, 2024, focus on speeding up fund deployment, enhancing transparency, and reducing mis-selling in the mutual fund industry.

What are the new proposals?

30-day fund deployment requirement

SEBI has set a 30-day timeline for Asset Management Companies (AMCs) to deploy funds raised through NFOs.

This is a reduction from the previous 60-day period. If AMCs fail to deploy the funds within the specified timeline, investors can exit the scheme without paying an exit load.

Limiting fund collection

AMCs will now be discouraged from raising excessive funds during NFOs.

They can only raise as much money as can be deployed within 30 days, ensuring that capital is put to use quickly and efficiently.

Lower commissions on switch transactions

To tackle mis-selling, SEBI has introduced a rule where distributors will earn the lower of the two commissions when an investor switches from an existing scheme to an NFO.

This reduces the incentive for aggressive sales tactics.

Relaxed regulations for AMC employees

SEBI has relaxed certain regulatory requirements for AMC employees.

The minimum investment amounts for designated employees will be reduced, and compliance disclosures will be simplified.

This change aims to retain skilled professionals in the mutual fund industry.

Mandatory stress testing disclosure

SEBI now mandates that mutual funds disclose stress testing results for all schemes. This will help investors assess the risks associated with their investments.

How do these changes benefit investors?

The 30-day deployment rule ensures that investor funds are put to work quickly, reducing the risk of idle capital. If AMCs fail to deploy the funds within the specified period, investors have the option to exit without incurring an exit load.

This offers greater flexibility.

By limiting the amount of money AMCs can raise, SEBI prevents the collection of excess funds that cannot be deployed efficiently.

Investors will also be assured that their money will be invested promptly and at fair valuations.

The changes to distributor commissions aim to reduce mis-selling and ensure that investors are not misled by inflated sales tactics.

Sandeep Bagla, CEO of TRUST MF, emphasised that the relaxation of employee regulations will help the mutual fund industry retain top talent.

He noted that it’s important for regulations to evolve alongside the industry’s growth.