SEBI to Mutual Funds: Deploy NFO money within 30 days or face restrictions

The Securities and Exchange Board of India (SEBI) on Thursday issued a circular mandating stricter timelines for the deployment of funds collected by Asset Management Companies (AMCs) in New Fund Offers (NFOs).

30-day deployment rule

As per the new guidelines, which come into effect from April 1, 2025, AMCs must deploy funds raised through NFOs within 30 business days from the date of allotment of units. In case of unavoidable delays, the matter must be referred to the Investment Committee, which can grant an extension of up to 30 business days after examining the reasons and ensuring corrective measures.

“The Investment Committee shall examine the root cause for delay in deployment before granting approval for part or full extension. The Investment Committee shall not ordinarily give part or full extension where the assets for any scheme are liquid and readily available,” the circular read.

AMCs failing to deploy funds within the prescribed timeline will face restrictions, including a ban on receiving fresh flows into the scheme until full deployment. The exit loads on redemptions will not be permitted beyond 60 business days of non-compliance, and investors will be given the option to exit the scheme without incurring any charges.

Role of trustees and fund managers

The trustees of mutual funds have been tasked with monitoring fund deployment and ensuring adherence to the specified asset allocation. AMCs have been granted flexibility to extend or shorten the NFO period, except for Equity Linked Savings Schemes (ELSS), based on market conditions and availability of assets.

In a bid to curb mis-selling, SEBI has also tightened rules regarding distribution commissions in case of switch transactions to NFOs within the same AMC. The commission paid will now be the lower of the two schemes involved in the switch, with detailed guidelines to be specified by the Association of Mutual Funds in India (AMFI) in consultation with SEBI.