Registration and Regulation of Mutual Funds – SEBI

Swetha Dhinesh

04 Mar, 2023

The mutual fund sector in India is constantly changing. Some Indian business organisations are funding investor education. Mutual fund investing is still viewed as a risky strategy. One of the most adaptable and comprehensive investments for those who are prepared to invest in a mutual fund because of the variety of possibilities available to an investor.
In India, mutual funds are a vital investment vehicle because they give investors a convenient and risk-free option to participate in various assets, including stocks, bonds, and commodities. Like with any investment, regulation is necessary to ensure that MFs operate fairly and openly and safeguard investors’ interests. In this blog, we’ll discuss registering and regulating mutual funds in SEBI.

Mutual funds

A mutual fund is a collection of professionally managed investments with the goal of buying a variety of securities and combining them into a strong portfolio that will provide you with attractive returns that are above and beyond the market’s present risk-free returns.

A mutual fund is similar to a financial instrument that holds the money collected from various investors in securities like stocks, bonds, and other securities. It is run by investment professionals who distribute the fund’s assets and generate income for the participants. Investors can buy diversified portfolios from it for a lower cost. According to their investment goals, the types of assets they invest in, and the kind of return they anticipate, it is categorised into a variety of categories. It charges expense ratio as annual fees and, in some situations, commissions.

How to get registered as a Mutual Fund

After getting the application for registration as a mutual fund, SEBI will walk the applicant through each step. As part of the registration procedure, responses are typically sent out within 21 working days after receiving each correspondence from the applicant. So, the entire registration time depends on how quickly the applicant meets the prerequisites.

The process of registering as a mutual fund with SEBI

The following steps must be taken by the applicant to register a mutual fund with SEBI:

Submitting Form A – Form A, an application for mutual fund registration, must be submitted first by the applicant. Also, the applicant must furnish the necessary information as specified by the SEBI.

Paying the application fee – The applicant must submit an application fee in accordance with regulation 3 of the SEBI (Mutual Funds) Regulations, 1996, in order to register. The Second Schedule further specifies the non-refundable nature of the registration fee.

Submit an application to meet the requirements – The authority will reject the application if it is found to be lacking. Nonetheless, it will offer the applicant a chance to complete those obligations within the timeframe set by the Board before rejecting the application.

Furnishing Information – The applicant or sponsor could be asked to give more details or clarification by the SEBI.

Examination of the Documents and the Application – The examination of the entire application, which includes document and application form verification, is the following step.

Verification of application – The applicant must be sure to present accurate information; if not, the Board may reject the application and instruct the applicant to submit the necessary paperwork, for which the applicant will be given the time allowed by the regulation.

The issuance of a Registration Certificate – The Board will provide the applicant with the certificate of registration in Form B if the information is accurate and the application is complete.

Regulation of Mutual funds in India

The Securities and Exchange Board of India (SEBI) oversees the securities market in India, including mutual funds. Through a set of rules and directives that control many facets of MFs’ operations, the SEBI governs them. These rules are intended to safeguard investors’ interests and guarantee that MFs operate transparently, equitably, and accountable.

Some necessary regulations are:

• Every mutual fund must register with SEBI.
• The 1996 SEBI (MFs) Regulations^[1]. These laws control how MFs are registered and run in India. The rules cover a variety of aspects of mutual fund operations, including the form and types of MFs, the qualifications and duties of fund managers, the criteria for disclosure, and measures to protect investors.
• An asset management firm (“AMC”), trustees, sponsors, and a custodian are always included in the structure of a mutual fund.
• SEBI Guidelines on Portfolio Disclosures: Under these rules, MFs must update investors on their portfolios’ holdings regularly. The disclosures must include information about the securities held by the fund, the assets’ sector-by-sector allocation, and the securities’ credit rating.
• In order to manage any conflicts of interest between fund managers, custodians, and trustees, an AMC of a mutual fund should have independent directors, a separate board of trustees that includes independent trustees, and independent custodians.
• The fees that AMCs can collect for mutual funds are subject to SEBI regulations, and there is a cap on the number of expenses that can be incurred by the fund.
• Advertisements for mutual funds are permitted, but they cannot contain misleading statements. For instance, since returns are based on market performance, no mutual fund can promise a return.
• The following is what SEBI mandates for both open-ended and closed-ended funds:

1. The minimum corpus required for an open-ended scheme is 50 crores.
2. A closed-ended scheme requires a corpus of at least 20 crores.
3. Every year, SEBI checks MFs to ensure that they are compliant with rules and norms.

• These recommendations, known as the SEBI Guidelines on Investor Protection, outline the steps mutual funds must take to safeguard the interests of investors. These precautions include selecting a custodian to keep and protect the fund’s assets, selecting an independent trustee to monitor fund management, and making sure the fund’s investments are diversified to lower risk.

MFs that only engage in the money market are required to register with the RBI. SEBI approval is required for Asset Management Companies (AMCs) which oversee mutual funds. The trustees of the AMC are responsible for ensuring that funds are operated in accordance with the rules. It is also charged with keeping track of the overall effectiveness of mutual funds.

The benefits of mutual fund

• It provides you with expert management. Investors can access experienced money managers with knowledge and experience in the buying, selling, and monitoring of investor investments through MFs.
• It enables you to hold a greater variety of shares at a lesser cost than you might otherwise. The value of the other investment in the Fund could rise or fall does not depend on the performance of the first one. You can benefit from the industry’s shifting environment by owning shares in the market. This promotes variety.
• It offers small investors the chance to participate in expert asset management and allows them to make low initial commitment requirements.
• The majority of mutual funds permit shareholders to transact on any business day. There are many funds that offer you an automatic buying scheme. It is done for the investors’ convenience and aids them in getting the most value out of their investment.

Conclusion

Indian capital markets, including mutual funds, are governed by the Securities and Exchange Board of India (SEBI), a legal entity. The principal regulator of mutual funds in India is SEBI, which has published a number of rules, circulars, and recommendations to control the mutual fund business. To guarantee that their investments in mutual funds are safe and secure, investors must abide by several rules and criteria. In addition to supervising and managing the securities market, SEBI also enforces rules and regulations to safeguard your interests as an investor.

Also Read:
How Does a Mutual Fund Operate?
Procedure for Mutual Funds Registration in India
Mutual Funds – Different types of Mutual Funds in India