SEBI proposes EPF-style investing in mutual funds — Here's all you need to know

The Securities and Exchange Board of India (SEBI) has in a draft consultation paper uploaded to its official website today proposed to enable third-party payments in mutual funds under certain scenarios.

In more simpler terms, it has proposed to allow your employers to provide salary-linked deductions towards your mutual funds, similar to the employees' provident fund (EPF) or national pension scheme (NPS) deductions.

The rules at present, mandate that the primary investor make all payments towards a mutual fund directly from their own bank account(s), or online via Reserve Bank of India (RBI) approved payment aggregators, or through SEBI-recognised clearing corporations.

The new draft proposes that investment by an employer on behalf of its employees and payment of commissions by asset management companies (AMCs) be allowed, with installment of adequate safeguards. It has sought public comments on the paper till 10 June.

Here's how your SIPs could change

Following the feedback, SEBI in its consultation paper has specified particular scenarios where third-party payments may be enabled without compromising the rules. Overall, the updates could change how your systematic investment plans (SIPs) work.

• Employer can pay for employee (your) investments in mutual fund units through payroll deduction — This will allow your employer to deduct payment for mutual fund contribution(s) directly from your salary.

“The proposed scenario acknowledges the established practice of employers offering various benefits and savings avenues to their employees. This mechanism would allow AMCs to accept consolidated payments for mutual fund investments through salary deduction,” Sebi said.

Payroll-linked means that instead of settling up auto-debits for SIPs from your bank account, you could instead have the contribution cut directly from your in-hand salary, similar to EPF and NPS contributions.

• AMCs can pay mutual fund distributors (MFDs) in the form of mutual fund units instead of trail commission — While not a direct impact for customers, it allows the fund houses to allot units to service providers instead of percentage commission from your sales / profits.

“The proposed scenario — allotting mutual fund units instead of trail commission, as agreed between AMC and the mutual fund distributor — will provide a convenient, seamless and disciplined way for the MFD to invest in MF units and will encourage MFDs to save and invest for the long term,” as per the paper.

• Contribution towards social causes — Further, the regulator has noted that investors can contribute a portion of the subscription amount or a scheme's return toward a social cause. This aims to facilitate investor contributions to social causes through a regulated, transparent and investor-protected framework.

What are the protection measures suggested?

SEBI has also proposed safeguards to protect investors from and management of Prevention of Money Laundering Act-related risks in third-party payments. These include:

• Robust KYC for both the payee and beneficiary,
• A clear written mandate, and an auditable, non-cash electronic fund trail via segregated accounts with regular reconciliation.

• AMCs must perform due diligence and ensure transparency, guaranteeing beneficiaries full redemption liquidity.

Why has SEBI proposed third-party payments for MFs?

The draft states that the proposal comes on the back of feedback from the mutual funds industry, seeking review of existing framework from the markets watchdog. The feedback included seeking permission for specified scenarios where third-party payments may be allowed without disrupting compliance requirements or investor protection under PMLA.

“The intent is to strike a balanced approach that facilitates ease of investing in genuine cases while reinforcing robust safeguards against potential misuse,” the SEBI document noted.

(With inputs from PTI)

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