SEBI Mutual Fund Regulations Overview
SEBI Mutual Fund Regulations Overview summarises the key provisions of the SEBI (Mutual Funds) Regulations, 1996 and its subsequent amendments — covering the trust and AMC structure, scheme categorisation, TER caps, disclosure requirements, and investor protection mechanisms that govern how Indian mutual funds are constituted, managed, and monitored.
The SEBI (Mutual Funds) Regulations, 1996 form the primary legal framework for the Indian mutual fund industry. Under this framework, a mutual fund must be constituted as a trust under the Indian Trusts Act, 1882, with sponsors who meet minimum net worth and track record criteria. The trust is managed by a separately incorporated AMC, and assets are held in custody by a SEBI-registered custodian. A Board of Trustees — with at least two-thirds independent trustees — exercises oversight of the AMC.
Scheme categorisation was overhauled by SEBI's October 2017 circular, which mandated that each AMC could operate only one scheme per category — one large-cap fund, one mid-cap fund, one small-cap fund, and so on. This eliminated the proliferation of similar schemes with different names and forced meaningful differentiation. The circular defined each category by market-cap ranges and investment mandate parameters, making cross-scheme comparison more meaningful for investors.
TER caps are specified in Regulation 52 and are updated periodically. SEBI introduced TER reductions in 2019 that lowered the maximum permissible expense ratios and linked them to AUM slabs. Additionally, SEBI mandated that no upfront commissions be paid to distributors — all distributor fees must be deducted from scheme assets on a trail basis, ensuring distributor incentives are aligned with investor retention rather than churning.
Key investor protection provisions include: NAV calculation and disclosure norms requiring daily NAV publication within specified cut-off times; mandatory monthly portfolio disclosure allowing investors to verify holdings; unit holder communication norms covering Consolidated Account Statement (CAS) dispatch; whistle-blower provisions for scheme employees; and restrictions on investments in group companies of the sponsor to prevent related-party conflicts.
SEBI's 2020 circular on mutual fund stress testing — requiring liquid and overnight fund managers to hold buffers and stress-test portfolios — was introduced after the Franklin Templeton India debt fund episode to prevent liquidity-driven winddowns. Subsequent circulars on risk-o-meter introduced a standardised six-level risk label (Low to Very High) that must be prominently displayed on all scheme communications, improving investor suitability assessment.