No KYC, no investment: SEBI proposes fresh rules for first transaction in new mutual fund folios

The Securities and Exchange Board of India (SEBI) has proposed to standardise the practice of execution of the first transaction in newly created mutual fund folios to mitigate the issues currently being faced by investors and AMCs.

In a consultation paper dated October 23, 2025, the markets regulator has also proposed the detailed procedure for opening new mutual fund folios in a draft circular titled ‘Process for opening of Mutual Fund Folios and Execution of First Investment'.

The draft circular has proposed the following rules for the creation of new mutual fund folios and the first investment in the same:

• Folios shall be created by AMC upon receipt of account opening documents and verifications as per the Know Your Client (KYC) norms for the securities market.

• Upon satisfactory KYC compliance, KYC documents shall be sent to KYC Registration Agency (KRA) by AMC, which shall complete the KYC verification.

• First investment in a new folio shall be permitted only after KYC verification is completed by the KRA and the folio is marked as KYC compliant in the KRA system.

• Investors shall be informed at each stage of the KYC process through their registered email and mobile number.

The draft circular further directs AMCs, KRAs and intermediaries to update their internal systems and workflows to ensure compliance with the above.

Why it matters?

The above proposals will help address the following issues currently being faced by investors and AMCs.

At the time of a new investment under a new folio of a different scheme, the investor is unable to execute any transaction until the KYC status of the investor is marked as compliant in the KRA system.

Investors are also unable to receive redemption proceeds and dividends into the bank accounts where the bank account details are incorrect.

Further, AMCs are unable to deliver physical/email communication to the unit holders informing vital developments in the scheme and mutual fund where the address is incomplete/incorrect. They are also unable to credit the redemption proceeds and dividends into the bank accounts where the bank account details are incorrect, which results in an increase in unclaimed redemptions and unclaimed dividends.

The draft proposals are currently open for public comments till November 14, 2025.