SEBI Sets Deadline for NFO Fund Deployment: What It Means for Investors

The regulatory authority for mutual funds in India - Securities Exchange Board of India (SEBI) has recently introduced significant amendments to mutual fund rules.

In a notification dated February 14, 2025, SEBI stated that "The scheme shall deploy the funds received in the new fund offer within the time period as may be specified by the Board from time to time."

In simple words, SEBI has mandated the fund houses to deploy the funds collected during NFO period within a specified. Asset Management companies (AMCs) now have a 30-day window to deploy the funds being raised by NFOs, this is a significant reduction from the previous 60 days timeframe.

[Read: Here's How SEBI Wants NFO Proceeds to Be Deployed]

This move aims to sets a strict time limit for the deployment of funds raised through New Fund Offers (NFOs), enhancing transparency, improved fund efficiency, and protects investor's interests.

The amendment comes at a time when the mutual fund industry is witnessing rapid expansion, with a surge in NFOs catering to various investment themes and asset classes.

Mutual fund houses are now required to disclose the deployment status of funds collected by NFOs on their official websites and report to SEBI at regular intervals. Moreover, the capital market regulator has mandated the disclosure of stress testing for mutual fund schemes. This will provide investors with better insights into the functioning of these schemes.

So this amendment has come after the SEBI board approved a proposal in December 2024, asking the fund managers to deploy funds collected during the NFO period as per its set asset allocation within a given timeframe.

Do note that, these changes are to be implemented from April 01, 2025 and are aimed at enhancing the operational flexibility for mutual funds while ensuring greater accountability and trust among investors.

How this amendment benefits the investors?

You see, the 30 day timeframe for deployment of funds ensures that investor's money is put to work quickly reducing the risk of idle capital. Now in case any of the AMCs/fund houses fail to deploy the schemes within specified timeframe, investors do have an option to exit from the scheme without incurring any exit load.

The mutual fund houses must ensure that their deployment strategy aligns with the liquidity requirements, as this will prevent funds from being locked in illiquid assets. This offers investors with better flexibility and allows them to have a visibility on how their funds are utilized post NFO.

This limited time period prevents AMCs from collecting excess funds that may not be deployed in an effective manner. It also ensure the investors that their funds will be invested prudently at fair valuations.

[Read: All You Need to Know About SEBI's Mutual Fund Lite and New Asset Class Framework]

While this amendment presents some challenges for fund houses, it ultimately benefits investors by reducing inefficiencies. As the mutual fund industry adapts to these new norms, investors should stay informed and make prudent investment decisions.

With regulatory measures tightening, the focus should now be on selecting NFOs that align with long-term investment objectives rather than being swayed by short-term market trends. Informed decision-making, combined with SEBI's strengthened regulatory framework, can pave the way for a more robust and investor-friendly mutual fund ecosystem.