The Securities and Exchange Board of India (SEBI) has released a Consultation Paper on the Standardisation of Process for Opening of Mutual Fund Folios and Execution of First Investment, inviting public comments until November 14, 2025. This initiative seeks to simplify and streamline the process of creating new mutual fund folios, ensuring full compliance with Know Your Client (KYC) norms before any investment is executed.
Objective of the Consultation Paper
The primary goal of this proposal is to make the mutual fund investment process more transparent, secure, and investor-friendly. SEBI aims to ensure that any new folio opened for an investor is fully KYC compliant—both at the Asset Management Company (AMC) level and within the KYC Registration Agency (KRA) system—before transactions begin.
Currently, investors can start investing as soon as their documents are submitted to the AMC, even though final verification by the KRA might still be pending. Under the proposed system, investments will only commence once the KRA confirms KYC compliance, thereby minimizing potential risks and operational inefficiencies.
Background: The Need for Change
Although SEBI already mandates KYC compliance before folio creation, the existing sequential verification process has led to practical challenges. Typically, AMCs perform preliminary KYC checks and forward investor documents to the KRA for final verification. However, discrepancies often arise when KRAs find deficiencies in submitted details—such as incomplete addresses or incorrect bank information.
As a result, folios are sometimes marked as KYC non-compliant, causing several issues:
- For investors:
- They are unable to make further investments or transactions until their KYC is verified.
- Redemption proceeds or dividends may fail to reach their bank accounts if incorrect details were provided.
- For AMCs:
- Communication with unitholders becomes difficult if address details are incomplete.
- Redemption proceeds and dividends may not be credited properly, leading to a rise in unclaimed amounts.
This fragmented process has resulted in delays, confusion, and operational inefficiencies—issues SEBI now seeks to address through standardization.
Proposed Solution
The consultation paper proposes a standardized process for opening new mutual fund folios and executing the first investment. The key reform is that AMCs should wait for the KRA to complete and confirm KYC verification before processing any investment. This procedural alignment aims to:
- Ensure only KYC-verified investors can transact in mutual funds.
- Prevent the creation of non-compliant folios.
- Enhance the overall integrity of the mutual fund ecosystem.
The detailed proposed procedure is outlined in SEBI’s draft circular titled “Process for Opening of Mutual Fund Folios and Execution of First Investment.”
Public Consultation: How to Participate
SEBI encourages stakeholders—including investors, AMCs, distributors, and financial experts—to share their feedback. Comments can be submitted online through SEBI’s public consultation portal at:
Participants should read the instructions carefully and provide their level of agreement with each proposal in the online form.
Conclusion
SEBI’s initiative represents a significant step toward a more robust and investor-protective mutual fund ecosystem. By standardizing the folio opening process and linking investments directly to verified KYC compliance, SEBI aims to eliminate operational inefficiencies and reduce instances of unclaimed dividends and redemptions.
Investors and industry participants are encouraged to review the consultation paper and provide their input before November 14, 2025, helping shape a more efficient and transparent mutual fund marketplace in India.