The Securities Exchange Board of India (SEBI), in partnership with the Association of Mutual Funds in India (AMFI), had made a significant clarification regarding the assessment of mutual fund distributor commission for transactions involving a switch from liquid funds or overnight funds into New Fund Offers (NFOs) be it equity mutual funds or debt mutual funds, which will provide mutual fund distributors (MFDs) with relief and clarity. This solution checks that MFDs’ commissions are safely protected under specific conditions, removing any confusion and potential income losses.
SEBI’s Circular on Commission Reduction
As per the recent circular released by SEBI on February 27, 2025, it aims to reduce unethical selling in the mutual fund sector. It required that the commission paid to mutual fund companies in the event of a switch from an existing mutual fund scheme (both equity mutual funds and debt mutual funds) to an NFO of a regular plan run by the same Asset Management Company (AMC) be the lower of the two commission rates: the switch-in (NFO) scheme and the switch-out scheme.
The Exemption: Relief for MFDs Switching from Liquid/Overnight Funds
As per the latest AMFI Guidelines (Circular No. 121/2025-26), SEBI has exempted MFDs from receiving a lower commission in specific scenarios:
The requirement of lower commission shall not be applicable for switch transactions where the source scheme is a liquid fund or overnight fund, subject to the condition that investments in such liquid funds or overnight funds have not been made through a switch transaction from other schemes within the preceding 30 calendar days.
Two conditions follow this exemption:
- The investment in the liquid or overnight fund must be fresh, not the result of a switch from another scheme within the last 30 days.
- The switch to the NFO must be from this fresh investment.
Why is this important for MFDs?
Protection of Commission Revenue
This explanation greatly safeguards mutual fund distributors’ profits. Before switching to an NFO, MFDs ran the danger of losing their commissions if they advised the consumers to temporarily store their money in low-risk assets like liquid funds. This many a time resulted in adequate remuneration for the operational and consulting work required.
Greater Availability in Investment Strategy
For the clients who are waiting to invest in NFOs, MFDs can now confidently suggest liquid funds or overnight funds as short-term parking solutions. Because of their improved liquidity and low-risk profile, these products are particularly helpful for short-term parking. MFDs made now concentrate entirely on what is best for the clients without worrying about commissions being reduced.
Guidelines for Applicability
In addition to the exemption, AMFI has also clarified that these guidelines will apply from 1 April 2025 and will apply to all NFOs launched from that date onward.
Another regulatory instrument, such as:
- Validity for ARN (AMFI Registration Number)
- Submission of Self-Declaration Certificate
Final Thoughts: Best of Both Worlds for MFDs and Investors
- As per SEBI’s clarification, MFDs will not suffer reduced commissions upon moving from liquid/overnight funds to NFOs (both equity mutual funds and debt mutual funds)—as long as fresh investment guidelines are observed.
- It also enhances an unmerited income impact cut that affected MFD earnings due to fund strategy and client-centric moves or even due to fund shifts.
- This underpins the trust of MFDs, supporting prudent fund holding ahead of longer-term equity or debt mutual fund investments.
- More eligibility sign criteria, such as the 30-day rule, help reduce ambiguity as operational miscommunication or clash between AMCs and distributors is minimized.
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