Sebi Revamps Mutual Fund Distribution Incentives to Boost Financial Inclusion
The Securities and Exchange Board of India (Sebi) has unveiled a comprehensive incentive framework designed to reward mutual fund distributors for expanding the investor base into underserved areas and demographics. The market regulator's new policy specifically targets first-time investors from B-30 cities and new women investors from any location across India.
Incentive Structure and Implementation Timeline
Under the revised framework announced in Thursday's circular, distributors will become eligible for an additional 1% commission on the first investment application. This incentive comes with a maximum cap of ₹2,000 and applies to both lump-sum investments and systematic investment plans (SIPs). However, investors must maintain their investments for at least one year to qualify.
The regulator has set February 1, 2026 as the effective date for implementation, providing the mutual fund industry a three-month preparation period to update systems, documentation, and internal processes. Sebi and the Association of Mutual Funds in India (Amfi) will release detailed implementation standards within the next 30 calendar days.
Strategic Exclusions and Guardrails Against Misuse
While the incentive covers most mutual fund schemes, Sebi has deliberately excluded certain categories from eligibility. The exclusions include exchange-traded funds (ETFs), domestic fund-of-funds schemes with over 80% assets in domestic funds, and short-duration schemes such as overnight, liquid, ultra-short duration, and low-duration funds.
These exclusions align with Sebi's consistent position that distributor incentives should encourage long-term market participation rather than short-term trading activity. The circular also explicitly prohibits dual incentives for the same investor or investment, ensuring distributors cannot claim both B-30 and women investor bonuses simultaneously.
The additional commission will be funded from the two basis points of daily net assets that asset management companies (AMCs) already earmark annually for investor education, awareness, and financial inclusion initiatives. The framework also includes appropriate clawback provisions to safeguard against potential misuse.
Industry Response and Market Impact
Santosh Joseph, founder of Germinate Investor Services, welcomed the move, stating, "It is a very welcome move by Sebi to understand that you have to feed where the growth is coming from. The incentive is rehashed and very well guarded."
The initiative addresses the practical challenges distributors face in smaller cities, where they often incur additional costs for physical visits and manual KYC documentation. The incentives are designed to compensate for these efforts while encouraging deeper market penetration.
Recent data underscores the growing importance of B-30 locations, which accounted for 19% of the mutual fund industry's assets in September 2025. According to an Icra Analytics report citing Amfi data, assets from these centers grew to ₹14.50 trillion from ₹14.14 trillion in August, representing a 2.6% monthly increase and 15% annual growth.
This revised framework comes after Sebi asked mutual funds to discontinue previous B-30 incentives in 2023 due to misuse concerns. The regulator stated the changes aim to serve "the interest of investors and to promote the orderly development" of India's mutual fund industry, reflecting a balanced approach between expansion and regulation.
