Investors considering investing in mutual funds should understand the SEBI guidelines for mutual funds. The SEBI MF Regulation of 1996 lays down the guidelines for the regulation of mutual funds in India. Under these guidelines, the asset management companies are treated as Public Trust, which comes under the Indian Trust Act of 1982. The SEBI provides guidelines for the fund manager, the representatives, and the investor. In this article, we have covered the SEBI guidelines for mutual funds for investors.
SEBI in India
SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that came into existence on 12th April 1992. The principal responsibility of SEBI is to regulate the capital markets of India. SEBI regulates the capital market and protects the investor’s interest by imposing rules and regulations. The main aim of SEBI is the systematic working of the Indian capital markets and transparency in the investors’ investment. The introduction of SEBI regulations in 1992 ensures honesty and transparency in the Indian capital markets.
SEBI Guidelines For Mutual Funds
The SEBI guidelines for mutual funds protect the interest of prospective investors. SEBI has the responsibility of regulating the industry and laying down the guidelines to protect the investors’ interest. In terms of the scheme’s operation, the new guidelines have placed a strong emphasis on uniformity. As a result, investors will find it easier to make investment decisions to standardize as well as to bring uniformity to schemes that are similar to one another. The types of mutual funds are equity funds, debt funds, balanced or hybrid funds, solution-oriented funds, and other funds. The following are the SEBI guidelines for mutual funds:
1. Assessing Personal Finances
Mutual funds offer a better investment opportunity in comparison to other investment options. It has the potential to offer a higher return in exchange for a comparatively higher risk. Each scheme is different. Mutual funds are subject to risk and volatility due to exposure to the financial market and its fluctuations. The prospective investors should be aware of the risk associated with each scheme. Investors must thoroughly assess their investment objective and risk-bearing capacity in the event that such schemes underperform. The adverse performance of any scheme might affect the portfolio of the investors. Hence, investors’ risk tolerance must be assessed individually in accordance with each scheme.
2. Research Information Regarding Schemes
Before investing in any mutual fund scheme, it is crucial to understand the relevant information about the scheme. Detailed analysis and consideration of facts and information will make sure that an investor takes a well-informed decision. This way an investor can avoid surprises and be ready for the fluctuations in the financial market. The SEBI guidelines specifically focus on investors’ knowledge of guidelines and investor rights.
3. Diversification of Portfolios
To reduce the inherent risk of volatility, diversification within the mutual fund portfolio is very important. Diversification prevents the potentiality of huge losses and risks. Diversification of portfolios is instrumental in achieving sustainable long-term financial growth.
4. Refrain from Cluttering Portfolios
While selecting each scheme to develop a mutual fund portfolio, it is essential to match the investment objective and risk. After investing the investor must monitor the performance and manage the individual schemes patiently. An investor must hold those schemes which he or she can manage efficiently. Equal importance to every scheme must be the topmost priority for any investor.
5. Assigning Investment Duration
To encourage financial growth, the investors should assign an investment duration to each scheme. For instance, an equity mutual fund requires a long-term duration to achieve its investment duration. Accordingly, an investor must assign a time duration which is equal to or greater than the investment duration suggested by the scheme. This way an investor can sustain market fluctuations and volatility thereby reducing the associated risk.
Effects of New Categorization on Investors:
Investors will be affected by the new categorisation in the following ways:-
- As the number of schemes available is likely to be less, investors may find it easier to choose.
- SEBI through its guidelines eliminates the confusion with multiple schemes through the use of recommendations, and certain schemes may be merged with others.
- Investors’ expense ratios may decrease because of the increased assets under management per scheme.
- Experts believe that the standards for mergers and consolidations of schemes will make it easier for investors to compare and invest in the various schemes offered by fund companies.
- The regulations will eliminate confusion while bringing uniformity to mutual fund schemes. This will make it easier for investors all throughout the country to invest in mutual funds.
SEBI in India is the policymaker that regulates the mutual fund industry. The SEBI guidelines for mutual funds protect the investor’s interest. These guidelines help investors to make more stabilised and informed investment decisions. SEBI regulates and promotes the securities of the Indian market. It provides all the detailed information required for the functioning of any mutual fund scheme. Moreover, the guidelines issued by SEBI focus on simplifying the procedure of comparing different mutual fund schemes offered by fund houses. The SEBI guidelines for mutual funds are the way to protect the investments of mutual fund investors in different mutual fund schemes.