SEBI mulls allowing gift cards, prepaid instruments to invest in mutual funds: How the proposal will work

The idea, outlined in a consultation paper, is to let people gift an investment product rather than just cash, something the regulator believes could help bring new investors into the market.

How the proposal works

Under SEBI’s proposal, a person can purchase a gift prepaid payment instrument (PPI) and transfer it to a recipient, who can then use it to subscribe to mutual fund schemes.

“Gift Card/ Gift PPI is expected to improve financial inclusion through onboarding of new investors in the mutual fund space,” the market regulator said.

These instruments will be funded only through bank transfers or UPI from Indian bank accounts, and will come with a one-year validity. If the recipient does not use it within that period, the money goes back to the purchaser’s bank account.

Tracking this will fall on registrar and transfer agents (RTAs), who will monitor how much an investor has put in through these routes. If a transaction breaches the limit, it will simply be rejected, and the money returned.

There’s also a strict check on ownership. The regulator has reiterated that the “no third-party payment” rule will apply here as well.

What SEBI is proposing is really an extension of what already exists for e-wallet investments in mutual funds.

Currently, mutual funds are allowed to tie up with wallet issuers, but with several conditions: timelines and cut-off rules must be followed, redemption proceeds must go only to the investor’s bank account, and total investments through wallets and cash are capped at ₹50,000 per mutual fund per year.

Importantly, SEBI has drawn a hard line on incentives. Wallet providers cannot offer “cashback, vouchers etc., directly or indirectly” for mutual fund investments. Also, only genuine funds—loaded through banking channels like debit cards or net banking—can be used. Credit-based or promotional balances are out.

RBI framework shapes the backbone

The proposal also leans heavily on the existing framework laid down by the Reserve Bank of India (RBI), which regulates prepaid instruments.

RBI rules define PPIs as stored-value instruments and require issuers, banks or authorised non-bank entities, to follow strict KYC and anti-money laundering norms.

For gift PPIs specifically, there are additional restrictions: each instrument can hold up to ₹10,000, cannot be reloaded, and cannot be used for cash withdrawals or transfers (except back to the source account). These constraints effectively keep the product simple and low-risk.

Extra safeguards for investors

To further strengthen the framework, SEBI has proposed additional safeguards in consultation with the Association of Mutual Funds in India (AMFI). These include:

• Allowing redeemers to choose any mutual fund scheme offered by the AMC, with optional guidance from distributors

• Clarifying that any scheme suggestion by the purchaser will not be treated as investment advice

• Ensuring full utilisation of the Gift PPI amount for mutual fund subscription

• Mandating detailed disclosures on validity, refunds, and grievance redressal

• Requiring AMCs to avoid misleading marketing practices or “dark patterns”

Operationally, each redemption will involve a direct transfer from the PPI issuer’s escrow account to the mutual fund’s bank account, ensuring traceability of funds. AMCs will also track unclaimed PPIs and notify holders regularly.

Consultation open

The regulator has invited public comments on the proposal until April 14.

SEBI believes the introduction of Gift PPIs could enhance financial inclusion by onboarding first-time investors into mutual funds, while maintaining strong regulatory oversight.