SEBI Guidelines for Mutual Funds Investors

Swetha Dhinesh

09 Mar, 2023

Investors have access to a variety of investing options. Investors have access to solid investing opportunities through mutual funds as well. They also involve some risks, just like any investments. While making investment decisions, investors should analyse the risks and anticipated returns on various instruments after accounting for tax. When making financial decisions, investors may consult with specialists.

The SEBI (Mutual Funds) Rules of 1996^[1] control how mutual funds operate in India. These regulations treat MFs as public trusts covered by the 1982 Indian Trust Act. The rules call for a three-tiered structure made up of fund managers, investors, and representatives to handle MFs and ensure trustee responsibility.

Mutual Fund 

Mutual funds are a way to pool funds by selling units to investors and investing the money in assets in line with the stated investment goals in the offer document. Investments in securities are dispersed throughout a diverse range of businesses and sectors, reducing risk because not all equities will move in the same direction or amount at once. According to the amount of money the investors deposits, MFs issue units to the investors. Unitholders are individuals who invest in mutual funds via investors. Investors split profits or losses proportionately to their investments. MFs typically offer a variety of schemes that are periodically introduced with various investing goals. Before receiving money from the general public, a mutual fund must be registered with the Securities and Exchange Board of India (SEBI).

Guidelines for Structure of mutual fund schemes

According to the rules for scheme structure, a guarantor is someone who launches a mutual fund. The guarantor’s responsibility is to make money by starting a mutual fund. A fund manager is then given control of the fund.

The rules describe a sponsor as someone who creates plans in accordance with the requirements of the Indian Trust Act of 1882. The primary responsibility for listing the schemes with the Securities and Exchange Board of India is on the sponsors.

Establishing laws governing MFs is the responsibility of India’s Securities and Exchange Board. To protect the interests of investors, it also has a duty to legislate and regulate the industry. Mutual funds might differ significantly from one another in terms of “asset allocation” and “investment strategy”. When it comes to how schemes operate, the new guidelines have a common focus. Making investing selections will consequently be simpler for investors. The following is how MFs are categorised in order to establish standards and bring uniformity to programmes that are similar to one another:

• Equity funds
• Debt funds
• Balanced or hybrid funds
• Solution-oriented funds
• Other funds

Key Points of SEBI Regulation for Mutual Fund Investment

The following are the main points of the regulator’s mutual fund regulations:

• Five categories of mutual funds have been established: equity, debt, balanced, solution-oriented, and others.
• The definitions of the small, mid, and large caps have been clarified to promote uniformity.
• A lock-in period is associated with solution-focused funds.
• Except for ETFs or index funds, thematic or sectoral funds, and fund of funds, only one scheme may be used in each category.
• The Securities and Exchange Board of India has established rules for investors in addition to the law.

SEBI Guidelines to invest in Mutual Funds

1. Recommendations from SEBI for Investing in MFs – SEBI upholds the rules and regulations that control the nation’s securities markets. The following is a list of the rules for investors. MFs offer the widest variety of investing possibilities; as a result, there may be some risk associated with them. Investors must analyse their financial situation and risk tolerance very clearly in the event that these schemes don’t perform as expected. Investors must consequently take into account the investment scheme to take on risk.
2. Understanding the investments – As an investor, you must learn all there is to know about the mutual fund plan option before investing in mutual funds. The secret to making wise investments is to have the knowledge at hand when you need it to make the essential decision. It may aid in selecting the appropriate schemes, understanding the rules to follow, and being aware of the rights of investors.
3. Diversifying portfolios – By spreading their assets across several different programmes, investors can increase their chances of maximising earnings or reducing the risk of potentially enormous losses by diversifying their portfolios. Gaining long-term and sustainable financial growth requires diversification.
4. Avoid the clutter of portfolios – Selecting the ideal fund portfolio necessitates carefully controlling and overseeing each of these various schemes. The investor must choose the appropriate number of schemes to hold, avoid holding too many and be able to handle each one of them equally without clogging the portfolio.
5. Give the investing plans a time dimension – To promote the plan’s financial growth, the investors should give each scheme a time limit. If the plans are kept stable throughout time, it might help to contain the volatility and swings in the market.
6. Risk Profile – Mutual funds have some risk because they offer a wide range of options. So, it is preferable for an investor to be aware of their risk tolerance while preparing to invest in MFs. One should match their level of risk tolerance to the investment strategy one wants to use.

Impact of the new categorisation

The new categorisation will impact investors in the following ways: – 

• With the use of suggestions, SEBI’s rules remove the confusion caused by several schemes, and some schemes may be combined with others.
• Since there are likely to be fewer alternative schemes, choosing one may be simpler for investors.
• Due to the increasing assets under management per plan, investor expense ratios can be reduced.
• It will be simpler for investors to compare and invest in the numerous schemes offered by fund companies, according to experts, if there are criteria for mergers and consolidations of schemes.
• The rules would offer uniformity to mutual fund systems while removing misunderstandings. It will make investing in MFs simpler for investors across the nation.

How can I purchase a mutual fund scheme?

Normal practice for MFs is to disclose the date of the new scheme’s introduction in a newspaper advertisement. For the essential information and application forms, investors can also get in touch with the agents and distributors of mutual funds who are dispersed around the nation. Through the agents and distributors that offer these services, forms can be placed with MFs. 

These days, mutual fund units are also distributed through banks and post offices. Investors should be aware that banks and post offices are not endorsing the mutual fund schemes they are marketing, nor do they promise any specific returns. Banks and post offices’ sole function is to assist in the distribution of mutual fund schemes to investors.

Investors shouldn’t be carried away by commissions or gifts offered by agents or distributors in exchange for their business. On the other hand, they must consider the mutual fund’s track record and make unbiased recommendations.

Conclusion

These recommendations support and inform investors in their decision-making process. The Indian market’s securities are regulated and supported by SEBI. It offers every specific piece of information needed for any mutual fund plan to operate. The SEBI directions for MFs are a way to protect the investments of mutual fund investors in different mutual fund schemes. Choosing the appropriate mutual funds based on their investment objectives will assist the investor in making wise investment selections.

Also Read:
How Does a Mutual Fund Operate?
Procedure for Mutual Funds Registration in India
Registration and Regulation of Mutual Funds – SEBI