SEBI (Mutual Funds) Regulations — Overview
The SEBI (Mutual Funds) Regulations, 2026 have been the rulebook for every mutual fund in India since 1 April 2026. This lesson explains where they come from, what they cover and the main structural and cost rules they set.
Where the rulebook comes from
A mutual fund invests other people's money, so the law lays down who may run one, how the money is invested, what may be charged and what must be disclosed. In India that rulebook is made by the Securities and Exchange Board of India (SEBI) under the SEBI Act, 1992.
SEBI's first mutual fund Regulations came in 1993 and were replaced in 1996. The SEBI (Mutual Funds) Regulations, 2026 replaced the 1996 text from 1 April 2026 and are read with SEBI's Master Circular of 20 March 2026. Material that quotes the 1996 Regulations as current is out of date.
What the Regulations cover
They cover registration, the roles of the sponsor, the trustees and the asset management company (AMC), scheme launches, investment limits, valuation, expenses and disclosures. Every mutual fund must follow them.
Some familiar rules sit in circulars instead. Scheme categories come from SEBI's circular of 26 February 2026, which sets 40 categories: 13 equity, 17 debt, 7 hybrid, 1 life-cycle and 2 other.
Three tiers and their safeguards
A mutual fund has three tiers: sponsor, trustees and AMC. A sponsor qualifies by one of two routes. Route 1 asks for a five-year record in financial services, and the AMC's net worth must be at least ₹50 crore. Route 2 has no profit test for the sponsor, but the AMC needs ₹150 crore at registration and ₹100 crore later.
The sponsor must hold at least 40% of the AMC's net worth, so that it has a real financial stake. Conversely, anyone holding 40% or more of the AMC is deemed a sponsor and has to meet the eligibility tests.
The trustees oversee the AMC on behalf of unitholders, so at least two-thirds of the trustee company's directors, and its chair, must be independent.
Cost rules, and what regulation cannot do
The total expense ratio (TER) is the base expense ratio plus brokerage, transaction cost and statutory levies. Brokerage is capped at 0.06% of trade value in the cash market and 0.02% in derivatives.
Regulation limits misconduct and requires disclosure. It does not take market risk out of a scheme: the value of units still rises and falls with the portfolio.
Rules at a glance
An old study guide meets the new rulebook (illustrative)
Nikhil, a commerce student in Indore, revises from an old guide. It says the 1996 Regulations govern mutual funds, a sponsor needs a net worth of ₹5 crore and there are 36 scheme categories.
All three statements are out of date. The 2026 Regulations apply. They have no ₹5 crore sponsor rule; the net-worth figures apply to the AMC and depend on the sponsor's route. The 2026 circular lists 40 categories.
The 40% stake and the brokerage cap (illustrative)
- Assumptions for the arithmetic only: a Route 1 AMC has a net worth of ₹80 crore, and one of its schemes buys shares with a trade value of ₹5 crore in the cash market.
- Sponsor's minimum stake = 40% × ₹80 crore = ₹32 crore.
- Brokerage cap = 0.06% × ₹5 crore = ₹30,000.
Result. The sponsor must hold at least ₹32 crore of the AMC's net worth, and brokerage on the purchase cannot exceed ₹30,000.
Key points
- The 2026 Regulations replaced the 1996 Regulations from 1 April 2026; SEBI's first Regulations date from 1993.
- A mutual fund has three tiers: sponsor, trustees and AMC.
- The sponsor holds at least 40% of the AMC's net worth; a holder of 40% or more is deemed a sponsor.
- At least two-thirds of the trustee company's directors, and its chair, must be independent.
- The 40 scheme categories come from SEBI's circular of 26 February 2026, not from the Regulations.
Common misunderstandings
- There is no ₹5 crore sponsor net-worth rule, though older material quotes one: the figures apply to the AMC and depend on the sponsor's route.
- Brokerage is not inside the base expense ratio: it is charged outside it, within its own caps.
- SEBI regulation does not make a scheme free of risk: unit values can fall.
Questions people ask
Under which law are the Regulations made?
The Securities and Exchange Board of India Act, 1992.
What is the Master Circular?
SEBI's collection of its mutual fund circulars in one document. The Regulations are read with the Master Circular of 20 March 2026, which includes scheme categorisation.
Why must most directors of the trustee company be independent?
The trustees oversee the AMC for unitholders, so most of the board has to be free of ties to the sponsor and the AMC.
What this lesson relies on
- Securities and Exchange Board of India Act, 1992
- SEBI (Mutual Funds) Regulations, 2026 — regulation 5 (sponsor) and regulations 66 and 67 (expenses)
- SEBI Master Circular for Mutual Funds (20 March 2026) — Chapter 3 (categorisation, from SEBI's circular of 26 February 2026)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.