SEBI raises questions on 'mis-selling' of products by several mutual fund houses

The Securities and Exchange Board of India (SEBI) has reached out to several mutual fund houses, raising concerns about the mis-selling of mutual fund products. Specifically, there have been worries regarding the sale of high-risk mutual funds to investors with low risk tolerance.

This development, first reported by Livemint, follows recent remarks by SEBI addressing the 'froth' in the small-cap sector.

The capital market regulator has urged mutual fund houses to conduct stress tests on their small-cap schemes and disclose the results publicly. These stress tests will determine the duration required to liquidate 50% and 25% of the small- and mid-cap portfolio without compromising accumulated gains.

Sources familiar with the matter have informed CNBC TV-18 that SEBI, in its recent communications with various mutual fund houses, has expressed reservations regarding selling practices within the mutual fund industry.

Of particular concern are instances where high-risk mutual funds are being promoted and sold to investors with low risk tolerance.

The regulatory body has highlighted cases where small-cap funds, known for their high volatility and risk, have been sold to senior and super senior investors, potentially exposing them to undue risk.

“We have received a query from SEBI about transactions where retired investors have invested in small cap funds,” a senior official at a mutual fund house told CNBC-TV18.

He further explained that although most of these transactions are facilitated through distributors, SEBI expects the fund house to monitor transactions and ensure a check on risk mismatch.

Additionally, SEBI has questioned investments in schemes with lock-in periods, including solution-oriented funds, which are designed for long-term wealth creation but may not align with the investment objectives of certain investors.

Another CEO of a mutual fund, while stating that they haven't directly received such inquiries, acknowledged the occurrence of such communications. "

“It is SEBI’s way of tightening the noose. A lot of money is flowing into the industry, especially into high risk funds. In such times, many investors are lured by high returns. Essentially, SEBI is emphasizing that it's the responsibility of the fund houses to exercise caution,” said the mutual fund CEO.

Industry sources have indicated that mutual fund houses have received targeted inquiries from SEBI regarding these transactions.