SEBI’s New Mutual Fund Rules from April 2025

The Securities and Exchange Board of India (SEBI) has introduced amendments to mutual fund regulations, mandating that asset management companies (AMCs) deploy funds collected through New Fund Offers (NFOs) within a specified period. Additionally, the regulator has enforced new stress-testing disclosure norms to enhance transparency and protect investor interests. These changes, set to take effect from April 1, 2025, aim to improve operational efficiency while fostering greater trust and accountability in the mutual fund industry.

New Deployment Timeline for NFO Funds

In a notification dated February 14, SEBI emphasized that funds raised through NFO must be deployed within a timeframe specified by the board. This decision aligns with a proposal approved in December 2023, which requires fund managers to allocate NFO proceeds in accordance with the prescribed asset allocation of the scheme—generally within 30 days.

If an AMC fails to invest the funds within the stipulated period, investors will be granted an exit option without being charged an exit load. This move is designed to discourage AMCs from raising excessive funds during NFOs, as investors have the option to invest in open-ended schemes later at the prevailing Net Asset Value (NAV).

By enforcing stricter fund deployment rules, SEBI aims to prevent fund houses from keeping investor money idle or utilizing it inefficiently. This ensures that mutual funds remain aligned with their stated investment objectives and deliver value to investors in a timely manner.

Mandatory Stress Testing for Greater Transparency

To further strengthen investor protection, SEBI has also mandated stress testing for mutual fund schemes. Stress testing involves assessing how a scheme would perform under adverse market conditions, helping investors understand the potential risks involved.

This measure will provide investors with a clearer picture of the risk levels associated with different schemes, enabling them to make more informed investment decisions. By increasing transparency, SEBI aims to build confidence in mutual fund investments and ensure that investors are not caught off guard by unexpected market volatility.

Investment of AMC Employees’ Remuneration in Mutual Fund Schemes

As part of its broader regulatory overhaul, SEBI has also introduced a requirement for AMCs to invest a portion of their employees' remuneration into mutual fund schemes. This investment will be based on employees' designations and roles, ensuring that those managing investor funds have a direct stake in the schemes’ performance.

This initiative aligns the interests of AMC employees with those of investors, reinforcing accountability and promoting a more responsible investment culture. By having fund managers and key AMC personnel invest their own earnings in mutual fund schemes, SEBI aims to enhance decision-making discipline and mitigate conflicts of interest.

Implications for the Mutual Fund Industry

These regulatory changes reflect SEBI’s ongoing commitment to strengthening investor protection and improving fund management practices. By enforcing timely deployment of funds, increasing transparency through stress testing, and aligning AMC employees' incentives with investor interests, SEBI is working to create a more robust and trustworthy mutual fund ecosystem.

AMCs will now need to refine their fund allocation strategies, ensure compliance with stress testing norms, and adapt their remuneration structures to meet the new guidelines. While these changes may require operational adjustments, they ultimately aim to enhance investor confidence and create a more transparent and efficient mutual fund industry.

To implement these measures, SEBI has formally amended mutual fund regulations, reinforcing its role as a vigilant market regulator committed to safeguarding investor interests.