SEBI Regulations for Mutual Funds in India

Mutual funds in India operate under a regulatory framework established by the Securities and Exchange Board of India (SEBI). These regulations define who can sponsor and manage a fund, standardise scheme categories, mandate disclosures, guide portfolio valuation, and regulate expenses and transactions.

SEBI updates these norms through the Master Circular for Mutual Funds and specific circulars, ensuring investors receive consistent, reliable, and comparable information.

Table of contents

• Structure of Mutual Funds as per SEBI Guidelines
• Role of SEBI in Mutual Fund Regulation
• SEBI Guidelines for Mutual Funds

Structure of Mutual Funds as per SEBI Guidelines

A mutual fund is structured as a trust with four distinct entities:

1. Sponsor – Establishes the fund and applies for SEBI registration.
2. Trustees – Hold the fund’s assets for investors and monitor regulatory compliance.
3. Asset Management Company (AMC) – Manages day-to-day operations of schemes.
4. Custodian – Holds the securities of the schemes.

Trustees oversee AMC compliance, including portfolio valuation, expenses, related-party transactions, and adherence to SEBI’s code of conduct. AMCs must apply fair valuation principles, ensuring equitable treatment for all investors.

This segregation provides checks and balances to safeguard investors. These requirements are outlined in the SEBI (Mutual Funds) Regulations, 1996.

Role of SEBI in Mutual Fund Regulation

SEBI regulates mutual funds across three main areas:

1. Entry and structure – Registers mutual funds, verifies sponsor and AMC eligibility, and ensures independence of trustees and custodians.
2. Product and conduct – Standardises scheme categories, mandates disclosures, caps Total Expense Ratio (TER), defines valuation norms, and implements the Risk-o-Meter framework.
3. Supervision and updates – Issues the Master Circular and periodic updates, conducts audits, and monitors compliance to protect investors.

SEBI Guidelines for Mutual Funds

Uniform Scheme Categories

Introduced in 2017, the uniform scheme classification framework ensures that mutual fund scheme names reflect their investment mandate. For instance, a large cap fund must invest at least 80% of its assets in the top 100 companies by market capitalisation, while mid cap funds need at least 65% in companies ranked 101 to 250, and small cap funds must allocate at least 65% in companies ranked 251 onwards. By specifying both the investment universe and the minimum allocation, this system reduces style drift and helps investors make fair comparisons across similar schemes.

Risk-o-Meter

All schemes must display a Risk-o-Meter, indicating risk levels from Low to Very High. The risk level is reviewed periodically and updated when material changes occur, providing investors with a standardised view of scheme risk.

Fair Valuation and NAV

SEBI mandates fair valuation to ensure portfolios reflect realisable market values. NAV cut-off rules standardise the timing of purchase and redemption transactions. Since 2021, NAV for open-ended schemes is based on both the timestamping of the transaction and actual credit of funds to the scheme.

Expenses and Disclosures

SEBI caps TER and standardises expense reporting. AMCs must publish monthly factsheets, half-yearly financial statements, and detailed portfolio disclosures. These measures improve transparency and help investors compare funds.

Ongoing Compliance

The Master Circular for Mutual Funds consolidates requirements for scheme documents, advertising, risk labelling, voting disclosures, and trustee oversight. SEBI periodically updates the circular to address market developments and ensure uniform reporting.

Recent Updates

As of 2025, SEBI has strengthened compliance and cost transparency measures, including faster rebalancing for passive breaches and clearer disclosure of distributor payouts. Investors are encouraged to refer to the latest Master Circular and circulars for updated guidelines.

Key Assurances for Investors

SEBI’s framework provides investors with:

1. Clarity – Defined objectives and standardised scheme categories.
2. Transparency – Clear disclosure of risk, costs, and portfolio details.
3. Discipline – Structured processes for NAV calculation, valuation, and transactions.

Investors should align scheme categories with financial goals, review the Risk-o-Meter, check costs, and study the SID and KIM carefully.

Conclusion

SEBI’s regulations provide clarity, transparency, and discipline in mutual fund operations. By following these guidelines, investors can make informed decisions, compare schemes fairly, and choose funds aligned with their financial goals and risk tolerance.

FAQs

What are the major SEBI guidelines for mutual funds?

SEBI mandates a trust-based structure, standard scheme categories, Risk-o-Meter disclosures, TER caps, fair valuation, NAV cut-offs, and regular portfolio and financial reporting.

Can investors invest multiple times in the same fund?

Yes. Investors may invest through SIPs or lump sum transactions. Each transaction is subject to applicable NAV, exit load, and taxation.

What is the 80% rule in mutual funds?

Equity funds must invest a minimum portion of assets within their category: large cap funds at least 80% in the top 100 companies, mid cap 65% in ranks 101–250, and small cap 65% in 251 onwards. This helps maintain consistency and reduces style drift.

What is Regulation 3 of SEBI (Mutual Funds) Regulations, 1996?

It requires sponsors to apply to SEBI for registration of a mutual fund in the prescribed format, governing the setup of a mutual fund entity.

What does the Risk-o-Meter indicate?

It reflects the level of risk from Low to Very High and is updated whenever material changes occur in the portfolio.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.