INTRODUCTION
The concept of investment involves utilising one’s current resources or money to benefit others in the future, with time and risk-taking precedents. In today’s market, investors have a wide range of options to choose from, including non-marketable financial assets like bank deposits, provident funds, equity shares (blue-chip, mid-cap, sector-specific), bonds and debentures, money market instruments (T-bills, CDs, CPs), mutual funds of various schemes, and life insurance policies. They also invest in and deal with real estate, precious metals like gold and art, and financial derivatives such as futures and options, which is a growing field and will be more advanced and complicated in the upcoming times. Portfolio-wise decisions have a significant impact on long-term economic performance[1].
CONCEPT AND ROLE OF MUTUAL FUNDS
The SEBI Regulations, 1996 established a Mutual Fund, which is essentially ‘a trust that pools money from investors through the sale of units under various schemes and invests these funds in capital and money market instruments such as shares, debentures, bonds, or certificates of deposits’. This regulation was put into effect on 1 April 1996. The management of mutual funds by professional fund managers provides investors with the ability to access a diverse portfolio, reduce unsystematic risks, and gain knowledge that is not available to individual investors. Income or capital appreciation yields the returns, which are distributed among unit holders proportionally to their shares.
India has emerged as one of the fastest-growing markets globally, with mutual funds achieving a CAGR of almost 22% over the past decade, and assets reaching US $125 billion. This is in contrast to other emerging markets[2]. Monetary savings, idle funds, and capital market development are all dependent on their involvement. Why? The growth of mutual funds to 17.5 lakh crores in AUM by 2017 has made them an important contributor to economic development. In addition to providing diversification and a safety net, these funds also offer access to opportunities like IPOs that are not directly allocated.
HISTORY OF MUTUAL FUNDS
Mutual funds in India have historically evolved as a result of regulatory reforms and investor engagement. The history is more complicated (see details below). The first phase of the journey (from 1964 to 1984) was initiated in 1963 when Unit Trusts were created by the Government of India and the RBI to promote savings and investments. Until UTI took over the market in the second phase (1987-1993), public sector mutual funds were introduced through banks, LIC, and GIC. This step expanded the options for investors to invest and raised the AUM to 47,004 crores. From 1993 to 2003, the introduction of private sector funds and SEBI regulations was implemented, leading to the improvement and professionalisation of this industry. The industry had 33 fund houses that managed to accumulate more than 1,21,000 crores by 2003.1396. Between 2003 and 2014, UTI underwent a consolidation and growth phase in Phase IV, where it was divided into two companies while SEBI regulations were strengthened for investor security. SEBI’s gradual policies to increase penetration in tier II and III cities, increased retail participation, and the rise of systematic investment plans (SIPs) have led to a period of rapid expansion since 2014.2005.cf. The industry’s AUM surpassed 10 trillion in 2014 and reached a high of -38.42 trillion by September 2022, while investor folios have doubled to almost 14 crores[3].
LEGAL AND REGULATORY FRAMEWORK OF MUTUAL FUNDS
India’s financial markets function within a structured regulatory framework that is intended to protect investors and promote stable economic growth. This is the case. Under the Ministry of Finance, four main regulators operate in different areas: RBI is responsible for banking and money markets, SEBI is tasked with managing securities markets, IRDAI is charged with overseeing insurance, and PFRDA is handling pension funds. Under the Companies Act, 2013, investors are protected by strict provisions that punish misstatements in prospectuses, fraudulent inducement of investments, and fictitious applications for securities, with offences punishable under Section 447. The RBI Act, 1934, enhances depositor protection by allowing NBFCs’ depositors to repay matured deposits to the Company Law Board. This is further enhanced by this measure. Ambulatory action for the industry (AMFI) is not just a regulator; it promotes best practices, ethics and awareness of the investor. AMFI Registration Numbers (ARNs) are given to distributors, ensuring that mutual fund products can only be sold by intermediaries who have passed the NISM exams. This leads to the creation of accountability at the distribution level, where retail investors are most susceptible to mis-selling.
The AMFI also applies two important rules: the ACE, which is a high professional code of ethics for AMCs and trusteeship above (but not limited to) the SEBI-approved code, and the AGNI, which governs the conduct of distributors. Every breach is given serious consideration, starting with warnings and ending with the termination of ARN registration in cases where breaches are repeated. This layered strategy maintains discipline without hindering market expansion.’ Also, AMFI undertakes comprehensive campaigns for investor education, promoting Systematic Investment Plans (SIPs), raising awareness in urban areas (tier-II and III), and supporting the government’s financial inclusion initiative. These actions reveal a complex regulatory framework that comprises statutory legislation, executive authority of regulators such as RBI and SEBI, and industry initiatives such as ASCI/ASI projects like AMFI. This framework not only addresses fraud, misrepresentation, and default but also fosters trust, encourages participation, & deepens the financial market. India’s economy evolves, and a system that ensures efficient capital mobilisation while maintaining the interests of ordinary investors is what strikes ill-fated: Innovation meets stability and inclusion[4].
MUTUAL FUNDS RULES AND REGULATIONS IN INDIA
The Securities and Exchange Board of India (SEBI) is in charge of regulating mutual funds in India, while also providing transparency, investor protection, and accountability to Asset Management Companies (AMCs). This includes the SEC regulations. According to the SEBI Regulations, 1996, only trusts with a sponsor, trustee, AMC or can open mutual funds as they must first register with [SERB] for them to operate. Essential regulations include the Scheme Information Document (SID) and Key Information Memorandum (KIM), which require full disclosure of investment objectives, asset allocation and related risks. The transparency measure of SEBI requires the periodic disclosure of Net Asset Value (NAV), portfolio holdings, and performance reports[5].
Investors are protected by the Association of Mutual Funds in India (AMFI) through its Codes of Conduct. AMFI is not a regulatory body, but its Code of Ethics (ACE) for AMCs and the AGNI for intermediaries are all examples of ethical standards that are upheld by the organisation. To register, intermediaries must provide their AMFI Registration Number (ARN).
SEBI enforces strict regulations on misleading ads and investment concentrations to prevent malpractices by imposing rules on unit valuation, R2 (accounting) and redemption of units. Fraudulent activities have been punished under the Companies Act, 2013 and SEBI regulations.?
SEBI and AMFI’s regulatory framework, which includes guidelines for transparency in mutual fund operations as well as ethical practices to support investor confidence in India’s capital markets[6].
CONCLUSION
In India, mutual funds are now one of the most accessible and transparent investment vehicles, allowing retail and institutional investors to participate in capital markets under professional management. Their progress and credibility are largely due to a robust regulatory and ethical framework.’ SEBI (Mutual Funds) Regulations, 1996 are the fundamental framework for this system, which establishes trust structures with specific functions to be provided to each fund, including sponsors, trustees and custodians as well as Asset Management Companies (AMCs). Detailed disclosures, transparent reporting of Net Asset Value (NAV), portfolio holdings and scheme documents protect investors from misinformation.
AMFI works alongside SEBI by advocating for better ethical practices, establishing industry standards, and registering intermediaries through its ARN system. This is part of the AMFA umbrella organisation. Its Codes of Ethics and Conduct (ACE and AGNI) are used to enforce professional standards for AMC’s and distributors. A dual system of regulation and self-regulation fosters investor confidence. Also, regulations enacted under the Companies Act, 2013 and RBI provisions for depositors strengthen investor protection, whilst limitations on advertising, concentration of investments, and deceptive activity downgrade systemic risks. Mutual funds offer a mix of investment protection, openness to new investors, and professional expertise.
Author’s Name: Aditya Garg (University of Mumbai)
[1] Institute of Company Secretaries, Environmental, Social and Governance- Principles and Practice (2025th edition, Institute of Companies’ Secretaries Press 2025)
[2] Richa Singh, Mutual Fund Regulation in India (2019) Ipleaders <.https://blog.ipleaders.in/mutual-funds-regulation-in-india/ > accessed 9th September 2025
[3] Fibe Review Team, History of Mutual Funds: How it becomes popular in India(2025) Fibe <.https://www.fibe.in/blogs/history-of-mutual-fund/> accessed 9th September,2025
[4] University of Mumbai, Management of Mutual Funds (2025th edition, University of Mumbai Press 2025)
[5] Supra Note 3
[6] Bajaj Finserv, what is Mutual Fund? (2025) Bajaj Finserv<https://www.bajajfinserv.in/investments/what-is-a-mutual-fund> accessed on 10th September,2025
