SEBI to Introduce New KYC Norms for Mutual Fund Investors

In a move to enhance transparency and protect investor interests, the Securities and Exchange Board of India (SEBI) is preparing to introduce stricter Know Your Customer (KYC) rules for mutual fund investments. The new regulation will require investors to complete KYC verification before making their first investment or opening a new folio.

The objective behind this reform is to prevent errors, eliminate delays in payments, and improve transaction accuracy for both investors and fund houses.

Under the proposed framework, a new folio can only be activated once the investor’s KYC status is fully verified by a KYC Registration Agency (KRA). Until now, Asset Management Companies (AMCs) were allowed to accept investments based on their internal KYC checks. However, this often led to complications when discrepancies were found later, resulting in delayed redemptions, dividend payouts, or notifications.

The new rule will make KRA verification mandatory before the first transaction is processed, ensuring that every investment is compliant from the beginning.

According to SEBI’s proposed guidelines, the new system will function in the following manner:

This streamlined yet stricter process will help eliminate mismatches and reduce the number of unclaimed dividends or pending redemptions caused by incomplete KYC documentation.

Currently, when KYC verification is pending or incomplete, investors face temporary restrictions:

• They cannot make additional investments, and

• Redemption and dividend payments may be delayed.

For AMCs, this also creates operational challenges, as they cannot communicate or transfer funds to investors until their KYC is verified. The new SEBI rule aims to address these inefficiencies and strengthen investor protection mechanisms.

The proposed system is expected to offer several advantages for investors and fund houses alike:

• ✅ Fewer errors in KYC documentation and fund transfers.

• ✅ Better compliance with SEBI’s anti-fraud and anti-money laundering policies.

• ✅ Improved communication between AMCs and investors.

• ✅ Greater transparency and reduced processing discrepancies.

While the rule may introduce a slight delay in first-time investments, the long-term benefits outweigh the inconvenience. Currently, AMC-level checks take 1–2 days, whereas KRA verification may require an additional 2–3 days, depending on document validation and system updates.

SEBI has invited feedback from the public, investors, and market participants on the proposed KYC rule. Stakeholders can submit their suggestions via SEBI’s official web portal until November 14, 2025.

The regulator aims to incorporate valuable feedback to ensure smooth implementation and avoid disruption in mutual fund operations once the rule comes into force.

Additionally, AMCs, KRAs, and other intermediaries will need to upgrade their internal systems to align with the new standards. This will ensure seamless compliance and prevent any interruptions in the investment or redemption process once the revised rules are implemented.

By tightening KYC verification requirements, SEBI is reinforcing its commitment to building a transparent, investor-friendly mutual fund ecosystem. The proposed reform prioritizes accuracy, accountability, and security, helping investors avoid procedural delays and ensuring their funds remain safe.

While the verification timeline may be slightly longer, the overall outcome promises greater trust, efficiency, and protection in India’s growing mutual fund market.