SEBI’s New Proposals To Tackle Mis-Selling in NFOs

In a recent board meeting on December 19, the capital market regulator, the Securities and Exchange Board of India (SEBI) announced key proposals designed to safeguard the interests of mutual fund unitholders, particularly in the context of New Fund Offers (NFOs).

NFOs are events where a fund house offers units of a new mutual fund scheme to investors, typically with the promise of future growth. These new guidelines aim to address concerns related to delayed fund deployment and aggressive distributor incentives that often work against the best interests of investors.

SEBI’s New Proposals for NFOs

SEBI proposed that mutual fund schemes must invest the funds raised during an NFO within 30 days from the scheme’s launch period. Previously, this period was set at 60 days, which led to instances where funds remained uninvested, particularly in thematic funds, despite attracting significant investor interest. In addition, SEBI has introduced a new rule that will see distributors receive a lower commission between the existing scheme and the NFO when investors switch between schemes.

Impact of 30-Day Fund Deployment Rule

One of the most notable changes is the reduced deployment period for funds raised during NFOs. By mandating that fund houses must invest the money within 30 days, SEBI aims to ensure that the funds are being put to productive use promptly. This will limit the amount of money raised in NFOs to only what can realistically be invested in the short term, preventing fund managers from holding onto the money due to expensive market conditions, particularly in thematic funds.

In the past, fund managers sometimes delayed investing the funds from NFOs, especially in thematic schemes, as valuations soared, making it difficult to find attractive investments.

Protecting Unitholders with Commission Changes During Fund Switches

Another significant proposal addresses the issue of commissions earned by distributors when investors switch from one mutual fund scheme to another. In many cases, distributors encouraged investors to shift from low-fee schemes to higher-fee equity funds, often resulting in additional costs for the unitholders without corresponding benefits. The push for such switches was primarily driven by the higher commissions earned by distributors on the new, more expensive schemes.

To tackle this, SEBI has now mandated that when investors switch between schemes, distributors will only receive the lower of the two commissions (from the existing scheme and the new one). This change eliminates the incentive for distributors to aggressively push switches, protecting investors from unnecessary churning of their investments. As a result, mutual fund unitholders will be less likely to face forced switches that could erode their long-term returns.

What Does This Mean for Investors?

For mutual fund investors, SEBI’s new proposals are a positive step toward ensuring their investments are handled more transparently and efficiently. The 30-day fund deployment rule will help ensure that their money is put to work quickly, reducing the risk of funds being held back unnecessarily. The changes to distributor commissions will also help prevent unnecessary switching, ensuring that investors are not pushed into schemes that are not in their best interest.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.