Legal and Regulatory Framework — the rules that protect you

Four regulators, one ministry

India's financial system is split between four regulators, and knowing which does what is a guaranteed mark.

All four come under the Ministry of Finance.

Mutual funds are SEBI's, but they must also follow RBI rules on money market investments, investments outside India, investments by non-residents, and inward and outward foreign currency remittances. And since stock exchanges set their own listing, trading and margining rules, a fund listing its units must follow those too.

What SEBI is for

SEBI's Preamble states its basic function: "...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto."

Read that again — protect, develop, regulate. Three verbs, in that order.

Besides mutual funds, SEBI regulates depositories, custodians, RTAs and credit rating agencies.

The regulations target three things:

• Disclosures by issuers of securities
• Efficiency of transactions
• Low transaction costs

And they police four dangers: deliberate speculation, insider trading, excessive risks taken by mutual funds, and inadequate collateral by debt issuers.

The reasoning is worth understanding, because it explains the whole chapter. If these go unchecked, investors lose trust; trust lost means financial resources dry up; and household savings stop flowing into capital markets the economy needs for growth. Regulation is not there to inconvenience fund houses. It is there because a market nobody trusts stops being a market.

The regulations, and what triggered them

Mutual fund regulations were first issued in 1996 and have been replaced by the Mutual Fund Regulations, 2026, with many amendments in between. SEBI groups the provisions into 17 categories — scheme documents, registration, consolidation, new products, risk management, disclosures, governance, secondary market activities, NAV, valuation, loads and fees, dividend distribution, investment by schemes, advertisements, investor rights, certification of intermediaries, transactions in units, plus CDMDF, Execution Only Platforms, and miscellaneous.

You do not need to recite all 17. You do need three specific reforms, because each came out of a real crisis.

Total Return Index benchmarking. A Price Return Index counts only price movement — capital gains. A Total Return Index also counts dividends and interest, notionally reinvested on their ex-date. Since a mutual fund's own returns include dividend and interest income, comparing it to a price-only index flatters the fund. SEBI therefore mandated all schemes be benchmarked against Total Return Indices.

Think about what that meant in practice: overnight, fund performance looked worse against the benchmark — not because anything changed, but because the comparison finally became honest.

Segregated portfolios, after the 2018 credit crisis. When a debt security defaults, it becomes illiquid and hard to value. Without a mechanism, whoever redeems first gets out at an unrealistically high NAV, and whoever is slow bears the whole loss. A segregated portfolio ("side-pocketing") separates the distressed asset from the healthy ones, so all investors are treated fairly and the liquidity risk is contained.

The 2008 global liquidity crisis produced two specific reforms: premature redemption in FMPs was disallowed, and the phrase "liquid plus" was banned from scheme names — because it implied something better than a liquid fund, with the extra risk unmentioned.

There is also the Potential Risk Class (PRC) matrix, which classifies every debt scheme by the maximum interest rate risk (Macaulay Duration) and maximum credit risk (Credit Risk Value) the fund manager may take. It tells you the worst the manager is permitted to do, not what he is doing today.

What a scheme may invest in — Regulation 39

Seven permitted categories:

1. Securities
2. Money market instruments
3. Privately placed debentures
4. Securitised debt (asset-backed or mortgage-backed)
5. Gold or gold-related instruments
6. Silver or silver-related instruments
7. Anything else SEBI specifies

What a scheme may not do — Regulation 41 and Schedule 6

These exist because the investor has no control over investment management. SEBI's limits are the substitute for that control, and they apply at the time of making the investment.

• Settlement only in dematerialised securities, except where SEBI specifies otherwise
• No carry forward transactions, except as SEBI specifies
• Derivatives only on a recognised stock exchange, within SEBI's framework
• Short selling only on a recognised exchange, under SEBI's SLB framework
• Investments must be in listed or to-be-listed securities — with two exceptions: unlisted Government Securities and money market instruments other than commercial papers, and unlisted non-convertible debentures to the extent SEBI permits
• Inter-scheme investment within the same or another mutual fund is allowed without charging any fees — and this does not apply to fund of funds schemes
• No scheme may invest in a fund of funds scheme
• A fund of funds may not invest in another fund of funds, and may not invest outside mutual fund schemes except for liquidity needs
• Every mutual fund must buy and sell on the basis of deliveries — take delivery on every purchase, deliver on every sale. The exceptions are short selling and exchange-traded derivatives, both under SEBI frameworks
• Securities must be registered in the name of the mutual fund for the concerned scheme
• Pending deployment, funds may sit in short-term deposits of scheduled commercial banks

Gold and Silver ETFs are treated separately: their funds go only into gold/silver or related instruments, except what is needed for redemptions, with undeployed money in short-term bank deposits.

The Advertisement Code — Fifth Schedule

Advertisements must be accurate, true, fair, clear, complete, unambiguous and concise, and must not mislead. They must not:

• Contain false, misleading, biased or deceptive statements, or anything based on assumptions or projections
• Contain testimonials or rankings based on any criteria
• Be designed to be misunderstood, or to disguise the significance of a statement — including misleading by omission
• Carry exaggerated or unwarranted slogans, or slogans unrelated to the product's risk and return profile
• Feature celebrities
• Exploit investors' lack of experience or knowledge, or bury them in technical jargon and excessive detail
• Discredit other advertisements or make unfair comparisons

They must be consistent with the SID, SAI and KIM.

The standard warning — learn it word for word:

No addition or deletion of words is permitted. In vernacular advertisements it appears in that language. In audio-visual media, both the visual and the voice-over must be clear — the benchmark given is 14 words running for at least 5 seconds.

When advertising IDCW payouts, the advertisement must disclose the IDCW in rupees per unit, the face value, and the prevailing NAV at declaration — and immediately below the payout figure, state that the NAV will fall to the extent of the payout and statutory levy.

The celebrity rule — a two-part answer

This is asked almost every time, and the answer has two halves.

No celebrity may appear in an advertisement for a scheme. But SEBI permits celebrity endorsement at the industry level to increase awareness of mutual funds as a product category, subject to three conditions:

• It must not promote a particular fund's scheme or brand an AMC
• Expenses come only from the amounts aggregated at industry level for investor education and awareness
• Prior SEBI approval is required

That is why you see "Mutual Funds Sahi Hai" campaigns featuring well-known faces, promoting the category, but never a celebrity telling you to buy a particular fund house's scheme.

Advertising performance

Data must be computed from the last day of the month-end preceding the advertisement. It must state whether the performance is of the regular or direct plan, with a footnote that plans have different expense structures. If the same fund manager did not manage the scheme for the whole period, that must be disclosed in a footnote.

Since inception means since the date of allotment of units.

And a rule that stops cherry-picking: when a scheme's performance is advertised, the advertisement must also show the performance of all other schemes managed by that fund manager, as CAGR for 1, 3 and 5 years. If the manager runs more than six schemes, the AMC may show the top 3 and bottom 3 instead — bottom 3, not just the flattering ones.

Benchmarks for the standard comparison:

Your rights as an investor

Beneficial ownership. A proportionate right to the scheme's assets. You may ask for a Unit Certificate, or hold units in demat. Units held in dematerialised form are freely transferable — except ELSS, where transferability is curtailed for the statutory lock-in.

Change your distributor. By written request, and the AMC must comply without insisting on a No Objection Certificate from the existing distributor. This right exists because distributors used to hold clients hostage.

Inspect documents — Trust Deed, Investment Management Agreement, Custodial Services Agreement, RTA agreement, and the AMC's Memorandum & Articles of Association.

Appoint up to 10 nominees, with a specified percentage split. If no split is specified, equal distribution is presumed.

Pledge your units, normally as security to a financier.

Grievance redressal. Each AMC must publish complaint status in its annual report, on its website and on AMFI's website — complaints received, time taken, and pending. Pending complaints can be a ground for SEBI to refuse permission to launch new schemes.

On a change in fundamental attributes — you get an exit at prevailing NAV with no exit load, open for at least 30 days. Before any such change, or any change in fees and expenses affecting unitholders, the AMC must: send written communication to each unitholder (email/SMS included), display details on its website, and offer that exit option.

Terminate the AMC or wind up a scheme. 75% of unitholders can do either. Trustees must obtain unitholder consent when SEBI requires it in unitholders' interest, when 75% of unitholders require it, or when a majority of trustees decide to wind up a scheme or prematurely redeem a close-ended scheme's units.

Sue the trustees — not the trust. A trust is a notional entity, so investors cannot sue the trust. They can file a suit against the trustees for breach of trust.

Unclaimed amounts. The AMC must keep reminding investors by letter, and disclose the unclaimed amount and number of investors per scheme in the Annual Report.

• Claimed within 3 years → paid at prevailing NAV (you keep the income earned)
• Claimed after 3 years → paid at the NAV at the end of 3 years (income after that point is not yours)

Unclaimed money is deployed in the money market and in a separate plan of a Liquid scheme. The AMC may charge a maximum of 0.50% per annum, and no exit load applies.

Proceeds of illiquid securities. If a security written off as non-recoverable later yields money:

• Substantial and recovered within 2 years → paid to the old investors
• Otherwise → transferred to the Investor Education Fund

Caveat emptor applies. "Let the buyer beware." A unitholder cannot claim legal protection on the ground of not knowing something that was fairly and transparently stated in the scheme documents or is a provision of law. And note: a prospective investor — someone who has not invested — does not have the same rights as a unitholder.

Daily portfolio disclosure. Mutual funds must disclose debt and money market securities transacted in their portfolios, including inter-scheme transfers, on a daily basis with a time lag of 15 days.

Complaining, properly

The escalation ladder:

1. Investor Service Centre
2. Senior levels within the AMC
3. SEBI

The AMC must redress a grievance promptly, and not later than 21 calendar days from receipt.

SCORES — the SEBI Complaint Redress System — is a web-based centralised system at scores.sebi.gov.in, letting investors lodge, follow up and track complaints online, fully automated from lodging to closure. Someone unfamiliar with SCORES may lodge a physical complaint at any SEBI office, which is then scanned and uploaded.

SCORES handles complaints against listed companies and RTAs, brokers and stock exchanges, DPs and depositories, mutual funds, portfolio managers, and others (KRAs, collective investment schemes, merchant bankers, credit rating agencies, FPIs).

Cyber Security and Cyber Resilience Framework (CSCRF) covers five resiliency goals, adopted from CERT-In's Cyber Crisis Management Plan: Anticipate, Withstand, Contain, Recover, Evolve.

The AMFI codes

Two codes, two audiences — do not mix them up.

ACE — AMFI Code of Ethics. For AMCs and Trustees. SEBI's own Code of Conduct is in the Fourth Schedule of the Regulations; ACE supplements it, setting more explicit standards, higher than the Regulations require.

AGNI — AMFI Guidelines & Norms for Intermediaries. For you — individual agents, brokers, distribution houses and banks selling mutual fund products.

What happens if you breach AGNI:

1. AMFI writes to you, enclosing the complaint and evidence, asking for an explanation within 3 weeks
2. If no explanation arrives in 3 weeks, or the explanation is unsatisfactory, AMFI issues a warning letter stating that any subsequent violation will cancel your AMFI registration
3. On a proven second violation, registration is cancelled and all AMCs are informed

You have a right of appeal to AMFI.

Read step 3 carefully. Cancellation is communicated to every AMC — so a breach does not cost you one relationship, it ends your ability to distribute at all.