Abstract
Mutual funds have emerged as a critical vehicle for retail participation in India’s capital markets. The Securities and Exchange Board of India (SEBI), as the apex regulatory body, has consistently sought to strengthen investor confidence and market integrity. Recent reforms introduced by SEBI aim to enhance transparency, curb mis-selling, regulate operational costs, and reinforce corporate governance within the mutual fund sector. This article critically analyses these reforms, their implications on the industry, and how they seek to bolster investor protection in line with SEBI’s mandate.
Introduction
India’s mutual fund industry has witnessed exponential growth, with Assets Under Management (AUM) crossing INR 50 lakh crore in 2024, reflecting a robust CAGR of over 20% in the last decade. This rise in retail and institutional participation necessitates stringent regulatory oversight to protect investors from risks arising out of operational lapses, market volatility, or intermediary misconduct.
SEBI, under the SEBI (Mutual Funds) Regulations, 1996, has wide powers to regulate and supervise mutual fund activities. Recent reforms in 2024-2025 reflect SEBI’s proactive approach in ensuring investor interest is prioritised amid rapid market expansion.
Key Recent Reforms by SEBI
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Uniform Total Expense Ratio (TER) Slabs
Background
TER is the annual cost charged by mutual funds to investors as a percentage of assets managed. Historically, TER structures varied widely across schemes and fund houses, impacting investor returns.
Reform Highlights
In April 2025, SEBI proposed a uniform TER structure:
Slab-based TER caps based on AUM to standardise costs.
Additional expense limits removed to avoid hidden charges.
Disclosure of actual TER charged in monthly scheme factsheets.
Impact
This reform prevents fund houses from charging arbitrarily high expenses, thereby:
Enhancing investor returns.
Promoting fair competition based on performance rather than distribution incentives.
Improving transparency in cost structures.
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Strengthening Side Pocketing Framework
Background
Side pocketing allows segregation of distressed assets from the main portfolio, protecting investors from NAV dilution during credit events (e.g., defaults or downgrades).
Reform Highlights
In February 2025, SEBI strengthened side pocketing norms:
Side pockets can be created only with trustee and AMC board approval under exceptional circumstances.
Mandatory investor notification within one working day.
Enhanced disclosure norms on valuation of side-pocketed securities.
Impact
This prevents misuse of the side pocket mechanism, while ensuring investors are shielded from unexpected losses due to credit events in debt schemes.
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Tightening Distributor and Advisor Regulations
Background
Mis-selling of mutual fund schemes by distributors has long been a concern, often driven by commission-based incentives rather than investor suitability.
Reform Highlights
SEBI’s April 2025 circular introduced:
Mandatory risk profiling of investors before recommendations.
Suitability assessment linking investor goals, risk appetite, and recommended schemes.
Stricter penal provisions for mis-selling and non-disclosure by distributors.
Impact
Enhances investor protection by ensuring advice aligns with their financial goals and risk tolerance.
Increases accountability of intermediaries in the distribution ecosystem.
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Introduction of Performance-Linked Incentives
Background
Traditionally, fund managers earned fixed remuneration, with limited link to fund performance.
Reform Highlights
SEBI has mandated AMCs to incorporate performance-linked incentives for fund managers based on:
Consistent risk-adjusted returns over benchmarks.
Long-term performance rather than short-term gains.
Impact
This aligns fund managers’ interests with investors, incentivising prudent decision-making and responsible risk management.
5. T+3 Settlement for Mutual Fund Redemption
Background
Earlier, redemption proceeds for mutual fund units were credited to investors within T+4 days.
Reform Highlights
In May 2025, SEBI reduced the redemption payout timeline to T+3 working days for all mutual fund schemes.
Impact
Provides faster liquidity to investors.
Enhances market efficiency and investor confidence, especially during volatile periods.
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ESG Disclosures and Fund Labelling
Background
With rising investor interest in sustainable investing, SEBI introduced regulatory clarity on ESG (Environmental, Social, and Governance) funds.
Reform Highlights
Standardised labelling of ESG funds under specific categories.
Mandatory disclosures of ESG strategies, screening criteria, and portfolio composition.
Third-party audits of ESG fund disclosures.
Impact
Investors can now assess whether ESG funds align with their ethical and financial goals, reducing greenwashing concerns.
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Rationalisation of Risk-o-Meter
Background
The Risk-o-Meter is a visual tool indicating the risk level of mutual fund schemes. Previously, methodology inconsistency led to investor confusion.
Reform Highlights
In January 2025, SEBI:
Standardised calculation methodology across AMCs.
Introduced monthly updates instead of bi-annual.
Required display in advertisements and promotional materials.
Impact
Investors gain a clearer, timely understanding of scheme risk profiles, enabling better investment decisions.
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Cybersecurity Framework for AMCs
Background
The rise of digital transactions exposes AMCs to cyber threats, risking investor data security.
Reform Highlights
In March 2025, SEBI mandated:
Comprehensive cybersecurity policy and governance framework.
Quarterly cyber audit reports submitted to SEBI.
Real-time incident reporting mechanism.
Impact
Strengthens digital infrastructure security, safeguards investor data, and builds trust in digital mutual fund platforms.
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Corporate Governance Reform
BackgroundCorporate governance lapses within AMCs can adversely affect scheme management and investor trust.
Reform Highlights
SEBI’s 2025 reforms include:
Independent directors to constitute two-thirds of mutual fund trustee boards.
Mandatory tenure rotation of AMC CEOs and fund managers every 7 years.
Enhanced conflict of interest disclosures by AMC directors and KMPs.
Impact
Promotes ethical governance standards, preventing concentration of control and ensuring decisions prioritise investor interest.
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Investor Awareness and Education Initiatives
Background
Financial literacy gaps often lead to poor investment choices or vulnerability to market rumours.
Reform Highlights
SEBI’s ongoing “Invest Smart” campaign in 2025 focuses on:
Regional investor education programmes in Tier II and III cities.
Digital content on mutual fund basics, risk assessment, and grievance redressal.
Collaborative initiatives with AMFI and educational institutions.
Impact
Empowered investors are better equipped to participate meaningfully in mutual fund investments, reducing dependence on intermediaries for basic decisions.
Case Laws and Judicial Precedents
Though SEBI reforms are administrative, judicial pronouncements have reinforced its regulatory objectives.
Franklin Templeton Case (SEBI vs. Franklin Templeton, 2021)
Brief:
Franklin Templeton wound up six debt schemes citing liquidity issues without unitholder consent.
Judgement:The
Supreme Court upheld that unitholder approval is mandatory under SEBI MF regulations for scheme winding up.
Impact:
This judgement strengthened investor rights in scheme closure decisions, leading SEBI to tighten side pocketing and liquidity management norms in debt funds.
Challenges in Implementation
While reforms are comprehensive, practical challenges remain:
- Operational alignment: AMCs require robust IT and compliance upgrades to implement cybersecurity and TER reforms effectively.
- Distributor resistance: Uniform TER slabs and reduced commissions may face pushback from distributors reliant on commission-based earnings.
- Investor literacy: Regulatory changes need simultaneous investor awareness to derive intended benefits.
Conclusion
SEBI’s recent reforms represent a forward-looking regulatory approach focusing on investor protection, transparency, and market efficiency. By addressing operational risks, governance concerns, and distribution malpractices, SEBI aims to ensure India’s mutual fund industry continues its growth trajectory with enhanced credibility and investor confidence.
The challenge lies in seamless implementation by AMCs, proactive compliance monitoring by SEBI, and awareness among investors to understand and utilise these protections. As India transitions into a mature mutual fund market, these reforms will form the backbone of its stability and integrity.
Frequently Asked Questions (FAQs)
Q1. What is TER and why is SEBI regulating it ?
TER is the Total Expense Ratio charged annually by mutual funds. SEBI regulates it to prevent excessive investor costs and promote transparency.
Q2. What is side pocketing?
It is a mechanism allowing AMCs to segregate stressed or illiquid assets to protect investors in debt schemes from NAV dilution.
Q3. How does SEBI’s risk profiling reform protect investors?
It ensures distributors recommend schemes matching an investor’s risk appetite and goals, preventing mis-selling.
Q4. Why are cybersecurity reforms necessary for AMCs?
Due to increasing online transactions and data storage, AMCs are vulnerable to cyberattacks, risking investor data safety.
Q5. How will uniform TER slabs impact investors?
It will reduce hidden costs, standardise expenses across schemes, and enhance investor returns.
References
- SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2025/034 dated April 2025
- AMFI Mutual Fund Industry Updates 2025
- Supreme Court Judgement: SEBI vs. Franklin Templeton AMC (2021)
- SEBI Annual Report 2024-25
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