February 1, 2024

Regulator of Mutual Funds in India

Regulator of Mutual Funds in India

The Securities and Exchange Board of India (SEBI) is the Regulator of Mutual Funds in India that protects investors and preserves transparency in the operation of mutual funds in India and the overall stock market. SEBI is responsible for ensuring that investors are protected.

This article covers: 

Who Regulates Mutual Funds in India?

The Securities and Exchange Board of India (SEBI) is India’s major regulatory agency for mutual funds. SEBI is responsible for regulating all elements of mutual funds, including the establishment of mutual funds, their operations, the administration of mutual funds, fees charged by mutual funds, and their performance. 

According to the Securities and Exchange Board of India (Mutual Funds), Rules 1996 are the rules that dictate how mutual funds are regulated in India. These rules are subject to regular reviews and amendments to keep up with the ever-evolving market circumstances and the requirements of investors.

Structure of Mutual Funds

The mutual fund industry in India has a three-tier structure where the fund sponsors create and registers a fund, the trustees ensure that the mutual fund is functioning appropriately, and the AMC is responsible for managing the fund. 

  1. The fund sponsor is the entity that sets up the mutual fund and registers it with the Securities and Exchange Board of India (SEBI). In accordance with the Indian Trusts Act of 1882, mutual funds in India are organized in the form of trusts. 
  2. The trustees act as the watchdogs of the mutual fund and ensure that the fund is managed in the best interests of the investors. They are responsible for safeguarding the fund’s assets and ensuring compliance with SEBI regulations.
  3. A business known as an asset management company (AMC) is in charge of the trust’s management. This organization is accountable for overseeing the investments made by the fund and ensuring that the fund’s goals are achieved. The AMC is obligated to get registration with SEBI and is subject to the rules and guidelines that SEBI administers.
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When Did Mutual Fund Start in India?

It was in 1963 that the Unit Trust of India was established, marking the beginning of the mutual fund business in India (UTI). UTI was established by the Reserve Bank of India (RBI) to encourage people to participate in the growth of corporations and earn profit. 

UTI was the sole mutual fund available in India until the early 1990s, when private-sector mutual funds were finally permitted to join the market. At that time, the mutual fund business in India expanded at a breakneck pace, as seen by the huge rise in the assets under management (AUM) of the sector as well as the debut of various new mutual funds.

Regulation of Mutual Funds by SEBI 

SEBI is responsible for creating policies to regulate the mutual fund industry in India. The policies include the complete regulatory framework comprising rules and guidelines for creating, operating, managing, and performing mutual funds. The main goal is to protect the interests of mutual fund investors and ensure transparency in the functioning of mutual funds so that they can make informed decisions. 

The following is a list of some of the most important rules and recommendations that SEBI has released for mutual funds in India:

  • SEBI (Mutual Funds) Rules, 1996

These rules govern the establishment, maintenance, and administration of mutual funds in India. The rules cover issues such as the registration of mutual funds, the nomination of trustees, the function of fund management, investment limits, and transparency requirements.

  • SEBI (Mutual Funds) Rules, 2020

These laws were enacted to address concerns over the concentration of mutual fund portfolios and problems with risk management and asset allocation. The laws require mutual funds to diversify their stock and sector holdings throughout their portfolios to reduce the risk of concentration and increase the portfolio’s overall diversity.

  • Categorization and Rationalization of Mutual Fund Schemes

The Securities and Exchange Board of India (SEBI) has published this circular to rationalize the mutual fund business. To this end, the number of schemes that mutual funds provide will be reduced, and clear categorization rules will be introduced for mutual fund schemes. The goal was to simplify the process of understanding and comparing the various mutual fund plans for investors.

Things to keep in mind before investing in mutual funds

1. Analyzing One’s Own Financial Situation

Identifying one’s investing objectives is the first step in a comprehensive analysis of one’s financial situation. This involves establishing the time horizon of the investment, the amount of risk one is willing to take, and the projected return.

After establishing the objectives of the investment, the following stage is to devise a strategy for allocating the available assets. The investment portfolio might benefit from a more suitable asset allocation. The distribution of investments among a number of distinct asset classes, such as stocks, bonds, and cash, is what is meant by the term “asset allocation.” 

2. Do Research on the Concerning Schemes

Before putting money into mutual funds, doing a lot of background reading and research is essential. While investigating mutual funds, some important considerations to keep in mind include the following:

  • History of Performance- The performance of a mutual fund during its whole existence might provide light on how likely it is to generate returns in the future. Investors should examine the fund’s historical returns and evaluate how those returns stack up against the fund’s benchmark index.
  • Track Record of the Fund Management – The experience of the fund manager as well as their previous work, may give further context for understanding the fund’s future success. Before investing, potential investors should investigate the fund manager’s track record and investment strategy.
  • The reputation of the Fund House- While analyzing mutual funds, another factor to consider is the fund house’s reputation. The history of the fund house, its corporate governance standards, and its record of regulatory compliance should all be researched by potential investors.
  • Expense Ratio- The expense ratio may be considered the cost the mutual fund charges for managing the portfolio. Investors may determine which mutual funds provide the best value for their money by comparing the expense ratios of various products.

3. Investment Portfolio Diversification

The process of spreading one’s assets over a number of various asset classes and market sectors in order to reduce one’s exposure to risk is referred to as diversification. While investing in mutual funds, diversification is essential since it helps to decrease portfolio volatility and minimizes the effect of changes in the market.

Investors who want to diversify their holdings via the use of mutual funds may do so by purchasing a combination of equity, debt, and hybrid funds. Within each asset class, investors should also consider diversifying their holdings across various businesses and sectors to reduce the risk associated with concentration.

4. Keep your portfolios clear of unnecessary clutter.

The accumulation of an excessive number of mutual funds in an investor’s portfolio is a mistake they should try to avoid. The ownership of an excessive number of mutual funds may make it difficult to manage the portfolio and may lead to investments that overlap with one another. 

Instead, investors should concentrate on establishing a portfolio that is properly diversified using a few mutual funds that have been carefully picked.

5. Putting a Timeframe on the Investment

The amount of time an investor intends to continue to hold onto their mutual fund investment is the investment duration. The investment term is a variable that may change based on the risk profile and investment objectives of the investor.

Mutual funds that invest in debt may be a better option for investments with a shorter time horizon, whilst equity mutual funds may provide higher returns for investments with a longer time horizon. 

Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.

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Regulator of Mutual Funds in India- Quick Summary 

  • SEBI is the organization in India that is in charge of regulating mutual funds. SEBI’s primary responsibilities include protecting investors and ensuring the mutual fund industry operates openly and honestly. 
  • Mutual funds in India are organized as trusts and have a three-tier structure consisting of the fund sponsor, trustees, and asset management company (AMC).
  • The Unit Trust of India was established in 1963, marking the beginning of the mutual fund business in India.
  • SEBI has created policies to regulate the mutual fund industry in India, including the SEBI (Mutual Funds) Rules, 1996, SEBI (Mutual Funds) Rules, 2020, and the Categorization and Rationalization of Mutual Fund Schemes.
  • Before putting money into mutual funds, investors should conduct an analysis of their personal finances and investment objectives, conduct research on the various types of mutual fund schemes, diversify their holdings, avoid accumulating too many investments at once, and determine the appropriate investment duration based on their investment objectives and risk profile.

 Regulator of Mutual Funds in India- Frequently Asked Questions

1. What is the Regulation of Mutual Funds?

The regulation of mutual funds is done by the Securities and Exchange Board of India (SEBI), and they try to protect the interest of investors.  

2. What are the Steps taken by SEBI for Regulating Mutual Funds In India?

The steps taken by SEBI for regulating mutual funds in India are:

  1. SEBI (Mutual Funds) Rules, 1996
  2. SEBI (Mutual Funds) Rules, 2020
  3. Categorization and Rationalization of Mutual Fund Schemes

3. Is SEBI the Regulatory Body for Mutual Funds?

The Securities and Exchange Board of India, abbreviated as SEBI, is the major regulatory body for the Indian securities industry, which includes mutual funds. It promotes the growth of the securities market in India and protects the rights of investors in the securities market.

4. Could AMFI be Considered a Regulating Body?

AMFI is a self-regulatory organization (SRO) representing India’s mutual fund sector. Its full name is the Association of Mutual Funds in India. AMFI was created in 1995 to foster the growth of the mutual fund business in India. 

5. Is AMFI under SEBI?

SEBI acknowledges AMFI and is subject to the supervision of SEBI. AMFI is accountable for encouraging investor education, establishing industry standards, and monitoring compliance with legislation. It acts in accordance with the recommendations that SEBI has given.

6. Is Mutual Fund under SEBI?

SEBI is the government agency in India that oversees mutual fund regulation. The Securities and Exchange Board of India (SEBI) oversees and regulates all elements of mutual funds, including their operations, investing criteria, and disclosure obligations. 

7. In India, Which Bank is Responsible for Regulating Mutual Funds?

The Securities and Exchange Board of India (SEBI) is the authority that oversees mutual funds in India; no one bank is responsible for this function. 

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