AMC Governance

3.1 Investment Restrictions

SEBI MF Regulations prescribe detailed investment restrictions to ensure diversification, prevent concentration risk, and protect investor interests. These restrictions apply to all mutual fund schemes and are monitored continuously.

Single Issuer Limits

Regulation 44 prescribes limits on investments in a single issuer:

Sector and Group Limits

• Single Sector (excluding financial services): No specific limit except for diversified funds
• Financial Services Sector: Maximum 25% for credit risk funds
• Single Group of Companies: Maximum 20% of NAV (debt instruments)
• Unlisted Securities: Maximum 10% of NAV (debt funds), 15% for specified categories

Prohibited Investments

Mutual funds cannot invest in:

1. Unlisted equity: Except pre-IPO placements with conditions
2. Associate/Group companies: Beyond prescribed limits
3. Fund's own units: Except for FoF structure
4. Real estate directly: Except through specified REITs
5. Private placements of associates: Except with specific approvals

Derivative Investments

Mutual funds can use derivatives for hedging and portfolio rebalancing:

• Hedging: Covered positions in futures and options permitted
• Exposure Limit: Gross derivative exposure limited to scheme-specific norms
• Equity Schemes: Maximum derivative exposure equal to 100% of NAV
• Debt Schemes: Interest rate futures for duration management

3.2 Expense Ratio Limits

Total Expense Ratio (TER) is the annual charge deducted from scheme NAV to cover management fees, administrative costs, and other expenses. SEBI has progressively reduced TER limits to benefit investors.

Current TER Structure (Post-September 2018)

Additional TER Components

• B30 Cities: Additional 30 bps for fresh inflows from beyond top 30 cities
• Exit Load Credit: Exit loads collected to be credited to scheme for TER reduction
• GST: GST on management fees charged separately (within overall limit)
• Brokerage: Within overall TER limit, not separate

Special TER Categories

3.3 Investor Rights

SEBI regulations provide comprehensive protection to mutual fund investors through mandatory disclosures, grievance redressal mechanisms, and statutory rights. Investors are considered beneficial owners of the scheme assets.

Fundamental Investor Rights

1. Proportionate ownership: Investors own scheme assets in proportion to units held
2. Redemption right: Right to redeem at applicable NAV (except during restricted periods)
3. Information access: Right to receive scheme documents, NAV, portfolio disclosure
4. Dividend/distribution: Right to receive declared dividends
5. Residual rights: Right to proportionate assets on winding up
6. Nomination: Right to nominate for transmission of units

Investor Grievance Redressal

Multi-tier grievance mechanism:

• AMC Level: Investor Relations Officer and Compliance Officer
• Trustee Level: Trustees monitor unresolved complaints
• SEBI SCORES: Online complaint resolution portal
• SEBI Adjudication: For securities market violations
• SAT: Securities Appellate Tribunal for appeals

Investor Protection Measures

Unclaimed Redemption/Dividend

SEBI has prescribed norms for unclaimed amounts:

• Must be invested in money market instruments or liquid schemes
• Returns belong to original unitholders
• AMC to make efforts to contact investors
• After 3 years, transfer to Investor Education and Protection Fund (IEPF) provisions apply

3.4 Distributor Regulations

Mutual fund distribution is regulated to ensure fair dealing with investors. Distributors must be registered with AMFI, follow the code of conduct, and maintain proper records of transactions and commissions.

Distributor Registration

Requirements for becoming a mutual fund distributor:

1. NISM Certification: Pass NISM Series-V-A: Mutual Fund Distributors exam
2. AMFI Registration: Obtain ARN (AMFI Registration Number)
3. KYD Compliance: Complete Know Your Distributor requirements
4. Renewal: Certification valid for 3 years, renewable through CPE

Distribution Channels

• Individual Financial Advisors (IFAs): Independent distributors
• National Distributors: Large distribution houses
• Banks: Bancassurance/bank distribution
• Stock Brokers: Through demat route
• Direct Plans: Without distributor involvement
• Online Platforms: Fintech distribution

Commission Framework

Mis-selling Prevention

SEBI has instituted multiple safeguards against mis-selling:

• Suitability Assessment: Risk profiling of investors mandatory
• Audio Recording: For telephonic sales, recording required
• Cooling-off Period: For systematic plans, 30-day right to cancel
• Product Labeling: Clear risk disclosure on all documents
• Churning Restriction: Trail model reduces incentive to churn

3.5 Exit Load Framework

Exit load is the charge levied when investors redeem units before a specified period. The exit load framework has been reformed to ensure fairness and to use collected loads for the benefit of continuing investors.

Exit Load Principles

Current Exit Load Norms

Exit Load Utilization

SEBI mandated changes for exit load treatment:

1. Credit to Scheme: All exit loads collected must be credited to the scheme
2. TER Reduction: Exit load credit reduces TER for remaining investors
3. No AMC Benefit: AMC cannot retain exit load as revenue
4. Separate Tracking: Exit load collections to be tracked and disclosed

No Exit Load Scenarios

• Death of unitholder: Redemption by nominee/legal heir
• Fundamental attribute change: Exit within notice period
• Scheme merger: Exit during option period
• Systematic withdrawal: Within permitted limits
• Inter-scheme switches: Within same AMC (some schemes)

SEBI Circular on Liquid Fund Exit Loads

The graded exit load structure for liquid funds (introduced 2019) aims to:

• Reduce systemic risk from sudden large redemptions
• Discourage use of liquid funds for intra-day cash management
• Align with global practices for money market funds
• Protect long-term investors from redemption costs