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Summary: A rule that has always required mutual fund money to come from the investor's own account is about to change. Three exceptions are now on the table, and one of them raises a conflict-of-interest question that SEBI has flagged itself.
On May 20, SEBI issued a draft circular proposing to relax the rule that money entering a mutual fund must come from the investor's own bank account. The consultation paper sets out three scenarios in which third-party payments would be allowed. Public comments are open till June 10.
The rule being modified is paragraph 17.4 of the Master Circular for Mutual Funds dated March 20, 2026. The proposed exceptions follow representations from the industry and the Association of Mutual Funds in India (AMFI).
Payroll deduction by employers
An employer would be allowed to deduct money from an employee's salary and route it to a mutual fund of the employee's choice. The facility would be available to all listed companies and to EPFO-registered employers, including AMCs themselves. Participation by the employee is voluntary. Units would be allotted in the employee's name.
SEBI has asked whether an employer should be restricted from routing employees' money into a fund run by a group company.
Commission to distributors in mutual fund units
An AMC would be allowed to pay its empanelled distributor's trail commission, in whole or in part, in units of the AMC's own schemes. Only AMFI-registered distributors selling AMC's schemes would be eligible.
SEBI has flagged the conflict-of-interest question itself. Consultation No. 2(b) asks whether paying commission in units of the AMC's own schemes could lead to mis-selling and what safeguards should be in place.
Donation through mutual funds
An investor would be allowed to route part of her subscription, dividend, or redemption to a not-for-profit organisation (NPO). Two options are on the table. Option A creates a dedicated mutual fund scheme through which the donation flow would be routed. Option B switches the feature on across all existing schemes. The donation may go to a named NGO listed in the Scheme Information Document or to a Zero-Coupon Zero-Principal instrument issued by an NPO on the Social Stock Exchange.
SEBI has also asked whether the donation should be restricted to SSE-registered NPOs alone.
Safeguards proposed
The circular asks AMCs to validate the relationship between payee and beneficiary, complete KYC for both, maintain an electronic fund trail through segregated accounts, and credit all eligible proceeds, including dividends, only to the beneficiary's account. AMFI, in consultation with SEBI, will issue detailed guidelines. The obligation to comply with PMLA (Prevention of Money Laundering Act) rests with the AMCs.
The new provisions would take effect within 30 days of the final circular.
Also read: 4 steps to know if your mutual funds are working for you
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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