Understanding Mutual Fund Regulation and Compliance

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  • 05 Mar 2024
Understanding Mutual Fund Regulation and Compliance

With mutual funds becoming one of the most sought-after financial instruments among investors to grow their wealth, the SEBI has drafted certain regulations and compliance to protect investors’ interests and ensure transparency and smooth functioning of the industry. As an investor, it’s crucial for you to know them so that you can make an informed choice.

SEBI, the capital market regulator, oversees mutual fund operations in India. Time to time, it comes up with regulations to keep the interest of investors intact. While there are many regulations and compliance guidelines, here are the ones that matter to you the most as an investor:

Be KYC-Compliant

If you are a new investor willing to invest in mutual funds, you need to be KYC-compliant. It’s a customer identification process and is mandatory under the Prevention of Money Laundering Act 2002. From 1st January 2012, a centralized KYC registration process through SEBI-registered KYC Registration Agencies (KRAs) is in force. For KYC, you need to provide basic documents (address and identity proofs) along with your PAN card.

You can do KYC online or offline. For offline KYC, visit any of the registered KRAs with your documents and fill out the KYC form. You can download the KYC form from the website of fund houses or registrar and transfer agents. You can get your KYC done online on websites of fund houses. In the online process, your in-person verification is done via video call, where you need to show your original documents.

KYC is a one-time process, and once done, you can invest in any number of funds across fund houses.

Add a Nominee

You must abide by this essential compliance while investing in mutual funds. Your mutual fund investments need to have a nominee who will get the proceeds in case something happens to you. If you don’t want to add a nominee, you need to opt out of it. However, if you don’t do so and fail to add a nominee, your mutual fund folio may be freezed.

If freezed, you cannot withdraw units from your mutual funds. In mutual funds, you can add up to three nominees, indicating the percentage of shares you want them to receive. If you haven’t added a nominee, you can do so online or by visiting the nearest branch of the fund house.

Disclosure of Portfolio and Performance

SEBI has mandated that all fund houses must disclose their portfolio and performance regularly. While portfolio disclosure is required once every six months, the fund’s performance must be disclosed monthly. The disclosure must include information on investment strategy, sector-wise allocation, top holdings, etc.

Its purpose is to ensure transparency and boost investors’ confidence. You can get vital information by reviewing these disclosures and gauging whether the fund’s objectives align with your goals. You can also find out about any major changes in the fund’s asset allocation strategy and credit quality of the securities.

Ad Code Regulations

As per SEBI’s regulations on mutual fund ads, fund houses must resort to ethical practices during advertisements and not resort to any false or misleading information. Recently, the Association of Mutual Funds in India (AMFI) has directed fund houses to use only the 10-year CAGR to showcase investment returns in their ads. It has also asked fund houses not to show future returns, which could mislead investors.

While numerical illustrations can be used for SIP, SWP, and STP, fund houses can only show the CAGR returns prescribed by AMFI. The table given below showcases the maximum past returns that fund houses can use for various schemes are as follows:

Scheme Type Maximum Permissible Returns
Equity12.64% for Sensex; 12.93% for Nifty
Fixed-income Funds7.20%
Equity Hybrid Funds11.5%
Balanced Hybrid Funds10.07%
Debt-inclined Hybrid Funds8.56%
Multi-asset Funds9.92%

In Conclusion

The above mentioned regulations are designed to create a secure and transparent environment for investors. By adhering to these regulations, investors and the industry can build trust and contribute to their financial well-being. As an investor, understanding these regulations empowers you to make informed decisions and navigate the mutual fund landscape with confidence.

FAQs on Understanding Mutual Fund Regulation and Compliance

The Securities and Exchange Board of India (SEBI) ensures legal compliance in mutual funds.

Mutual fund compliance refers to adherence to regulatory guidelines and laws governing the operation and management of mutual funds, ensuring transparency, fairness, and investor protection. It involves monitoring and ensuring that fund activities comply with legal requirements set by SEBI.

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