Who regulates mutual funds in India?

Investing in mutual funds has gained significant traction in India. The ballooning size of the assets under management (AUM) of the mutual fund industry is a testament to its increasing popularity. While fund houses and others involved with the industry have played a crucial role in popularising them, one entity has worked to protect investors’ interests by regulating mutual funds. It’s the Securities and Exchange Board of India (SEBI).

How does SEBI regulate mutual funds?

SEBI, the primary regulatory body for securities in India, governs the mutual fund industry. It regulates all elements of mutual funds, including its establishment, operations and administration. SEBI (Mutual Funds) Regulations, 1996 dictate how mutual funds are regulated, and these are subject to regular reviews and amendments in tune with evolving market dynamics and investors’ needs. SEBI’s regulation for mutual funds comes in various forms, including:

• Mutual fund setting

Mutual funds are set up in the form of a trust. This trust has a sponsor, trustees, an asset management company (AMC), and a custodian. While the trust is established by a sponsor (which could be more than one), the trustees of the fund hold its property. The SEBI-approved AMC manages funds, while the custodian holds securities of various schemes under its custody.

As per SEBI MF regulations, all mutual fund agents/ distributors need to be registered with AMFI and obtain AMFI Registration number (ARN). They also must abide by the AMFI Code of Conduct for mutual fund distributors. In short, AMFI acts as the registering (licensing) body for mutual fund distributors in India by virtue of the responsibility delegated to it by SEBI.

• Mutual fund types

Mutual funds are classified into various types as per SEBI’s regulations. Based on their investment objectives and underlying securities, SEBI has classified mutual funds into these categories:

• Portfolio disclosures

These guidelines by SEBI talk about how and when mutual funds should disclose their portfolio holdings to investors. Theyhave details on what should be in the disclosure, including details of securities held by the fund, credit quality of securities, and sector-wise allocation of assets. According to these guidelines, fund houses must disclose portfolios once every six months, while scheme performance must be disclosed once a month.

• Advertisements

Innovative and appealing advertisements are among the primary reasons contributing to the popularity of mutual funds. That said, SEBI has defined clear guidelines on what fund houses can include in their ads. The regulator directed asset management companies (AMCs) not to highlight or assure returns to investors in their advertisements. It has asked fund houses to stick to approved advertisement codes while promoting their products.

Guidelines for investors

SEBI not only regulates mutual fund companies through its guidelines on various aspects but has also framed guidelines for investors for informed decision-making. As per them, investors should:

• Consider financial goals and risk tolerance before investing in mutual funds.
• Diversify investments across asset classes, including equity, debt and hybrid.
• Invest with a long-term outlook.
• Keep the portfolio simple.
• Do proper research on funds.

In conclusion

With its constant monitoring, SEBI ensures transparency in the sector while keeping investors’ interests intact. By promoting ethical practices, SEBI fosters investor confidence and promotes growth.