Sebi's New Proposal to Revolutionize Demat Mutual Fund Investments
The Securities and Exchange Board of India (Sebi) has introduced a groundbreaking proposal to extend systematic withdrawal plans (SWP) and systematic transfer plans (STP) to mutual fund units held in dematerialized (demat) form. This initiative, detailed in a consultation paper released on February 5, 2026, aims to enhance the ease of doing business and create parity between demat holdings and traditional statement of account (SoA) forms. Currently, demat investors face manual processes for redemptions, unlike their SoA counterparts who benefit from automated standing instructions.
Understanding the Proposed Changes
Sebi's proposal allows investors to register standing instructions for SWP and STP directly through depositories or stock exchanges, eliminating the need for manual intervention. The rollout will occur in two phases:
- Phase 1: Investors can set up unit-based SWP or STP instructions via stock exchange platforms, with execution handled through order-entry systems.
- Phase 2: Processing will shift to mutual fund registrars, enabling advanced features like amount-based withdrawals, appreciation-based switches, and swing STPs.
What Are SWP and STP?
An SWP facilitates regular withdrawals from a mutual fund scheme at fixed intervals, such as monthly or quarterly, ideal for retirees seeking steady income or investors aiming for tax-efficient gradual redemptions while maintaining market exposure. An STP enables gradual transfers between funds, typically from low-risk options like debt funds to equity funds, helping to mitigate market-timing risks and manage lump-sum investments or portfolio rebalancing.
Industry data indicates that while STP usage is widespread, SWP adoption has been slower. However, both tools are crucial for strategic financial planning.
Current Challenges for Demat Investors
Until now, demat mutual fund investors had to manually execute each SWP or STP transaction. This involved submitting delivery instruction slips (DIS) or using electronic authorizations, with processes requiring multiple steps—sell and buy orders, broker execution, clearing corporation settlement, and registrar updates. This manual approach contrasts sharply with the automated systems available for SoA holdings, where registrars handle everything from NAV calculations to payout processing without investor input.
Why This Change Is Necessary
Sebi highlighted that the existing framework fails to support the growing number of demat mutual fund holders, despite a 55% surge in demat accounts to 216 million by December 2025. This inconsistency disadvantages demat investors, who lack the flexibility enjoyed by SoA holders. The proposal seeks to modernize infrastructure, reduce intermediaries, and align with the digital shift in investment platforms.
Implications for Investors and the Industry
Investors, particularly those using online platforms like Zerodha and Groww, stand to gain significantly from streamlined SWP and STP processes. Deepak Shenoy, CEO of Capitalmind Mutual Fund, noted that this change will empower users of new-age trading platforms to manage investments more efficiently.
From a technical perspective, Phase 1 requires minimal modifications to stock exchange systems and no registrar changes, while Phase 2 may involve minor updates at mutual fund levels. Depositories will need to enhance their systems to support the new framework, but overall, the transition is expected to be smooth and cost-effective.
This move by Sebi not only simplifies cash flow planning but also promotes a more inclusive and efficient mutual fund ecosystem, reflecting the evolving landscape of digital finance in India.
