New SEBI Rules for Mutual Funds: All You Need to Know

On the 1st of July 2022, SEBI officially enforced the new rule for mutual funds and fund managers. However, despite receiving several newsletters and emails from these companies, many investors are unaware of what these changes signify. Instead, they have been bracing themselves to experience the brunt of the new rules. But, eerily enough, nothing seems out of place? Let’s find out the reality of the situation. 

Until recently, headlines on financial news portals alerted investors about implementing the latest SEBI rules for mutual funds. Initially, the circular issued by the government body required companies to adhere to these changes by the 1st of April 2022. However, the deadline was extended to July. 

This extension allowed companies to employ efficient technology overhaul facilities to smoothen the transition to the new rules. Additionally, it worked out the chinks of failing SIP transactions. 

So, what’s the rule? And how does it affect an investor and their mutual fund investments? Read on to find out more! 

The SEBI Rule: Bans Pooling of Money & Mutual Funds 

Before getting into the nitty-gritty of the SEBI rules, it’s essential to understand what pool accounts mean. Simply put, it’s a type of electronic wallet facility availed by brokers or mutual fund managers. The pool account works like a bank account, allowing brokers to pool money from various individual investors. It’s used to purchase mutual fund units for a particular scheme on behalf of the investors. 

As per the circular, SEBI prohibits using pool accounts for mutual fund investments. It mandates that the amount must be directly deducted from the investor’s account and credited into the bank account of the mutual fund house. While investors and other stakeholder parties may encounter the initial turbulence of such changes, all stock exchange-led transactions are required to implement these changes. 

Furthermore, mutual fund firms and other parties must comply with these new rules. It includes mutual fund distributors, online platforms, stockbrokers, and investment advisors. It will prevent them from collecting funds from investors in a bank account and transferring them to the fund house. While these rules may appear stringent, it’s a necessary precautionary step to ensure that the funds are not misappropriated. 

Previously, mutual fund investors and distributors highlighted issues like delayed confirmations about the allotment of units, limited payment modes, SIP failure, etc. The payment modes didn’t include cheques, RTGS, or NEFTs. SEBI considered it necessary to introduce some ground rules for more safe and secure usage of investor funds without room for misuse. 

Impact of SEBI’s Mutual Fund Rule on Investors 

With these changes in place, investors are confused about how they could potentially impact them. Learn about the different ways in which investors may encounter the ripples of the SEBI rule and how it affects their investment experience. Though, bear in mind that the complaints raised by users are currently in the process of being fixed by the respective AMC or firm. 

According to SEBI’s newest mutual fund guideline, investors need to link their mobile numbers with the backend payment service providers. It will add another layer of security to their bank accounts for investment-related transactions. And their phone numbers will be used to operate a mandatory two-factor authentication, applicable for fund redemption, switched, systematic transfer, and withdrawals. 

However, many investors took to social media to express their issues while accessing their accounts after these changes. They informed others that their bank statement was flooded with different payment providers’ names and how their email and SMS inboxes were the same.  

Regarding the matter, Tejas Kohoday, CEO of Fyers, said that these regulatory changes aim to “bring about regulatory changes for retail investors, and to improve transparency and reduce instances of fraud.”

Here’s how the new SEBI rule further affected mutual fund investors. 

●    Mutual Funds – Demat 

With the convenience of online platforms like Fyers Direct and Angel BEE, investors can easily open a Demat account and invest in mutual funds. But, the BSE Star MF platform or the Mutual Fund Service System (MFSS) by NSE processes all the mutual fund orders. So, until recently, stockbrokers used the Power of Attorney (POA) agreement before opening Demat accounts for online transactions. 

Instead of requesting signed POAs, the new alternative includes processes like transaction pin (TPIN) features. 

●    Mutual Funds – RTA Mode Online 

Some investors prefer the ease of mobile apps like Groww and others, but they haven’t opened up a Demat account with them. They have invested in mutual funds via the online registrar and transfer agent (RTA). In this case, the new SEBI guideline will impact all their current and future transactions. 

Swapnil Bhaskar, Head of Strategy at Niyo, explained the changes in the process of investors requesting mutual fund redemption. He said the following, 

“Whenever a user is requesting for redemption, an OTP will be triggered to their email and mobile that is registered in folio with the mutual fund companies. Users will have to verify the OTP to confirm the redemption.” 

In the broader picture, these changes may slightly inconvenience investors initially, but the long-term benefits will outweigh these troubles. As an additional layer of security, investors can sigh relief that their investors are appropriately invested in their preferred funds. Also, it prevents the involvement of too many parties in handling significant pool funds or misusing them. 

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