Your mutual fund investments currently have to be paid for from your own bank account. SEBI is now considering a relaxation to this rule. In a consultation paper issued on May 20, the regulator has proposed allowing third-party payments in specific situations, including investments made through salary deductions, commission paid to mutual fund distributors in units, and donations routed through mutual funds. The proposal is aimed at making genuine transactions easier while retaining checks against fraud and money laundering. For investors, the most relevant change may be the ability to invest through payroll, provided the final safeguards protect their interests.

What is SEBI trying to do through its consultation paper on enabling third party payments in mutual funds?

At present, mutual fund investments have to be paid for from the investor’s own bank account. SEBI is now considering whether this rule can be relaxed in a few limited situations where another party makes the payment, but the investment still belongs to, or benefits, an identified investor or beneficiary.

The consultation paper proposes allowing third-party payments in three cases:

SEBI is thus not proposing a free-for-all in third-party payments. It is examining whether specific, traceable relationships, such as that between an employer and employee, can be permitted as limited exceptions without weakening safeguards against fraud, money laundering, or misuse of investor accounts.

What do the existing rules specify regarding this?

Under the present framework, the money used to buy mutual fund units must come directly from the investor’s own bank account. Payments must also move through permitted channels, such as RBI-authorised payment aggregators or SEBI-recognised clearing corporations.

In regulatory terms, this creates a closed loop --- the investor, the source of the investment money and the recipient of the redemption proceeds are linked through verified bank accounts. A third-party payment breaks this link at the investment stage, which is why the present framework takes a conservative approach.

The rule helps the mutual fund system establish whose money is being invested, trace the payment route and ensure that redemption proceeds are paid only into verified bank accounts. These safeguards are intended to reduce fraud and money-laundering risks and support compliance with the Prevention of Money Laundering Act.

How will paying for MF units through employer help investors?

Under the proposal, an eligible employer could deduct an amount from an employee’s salary and make a consolidated payment to an AMC for investment in mutual fund schemes selected by the employee.

The facility would be voluntary. Only employees who opt for it would participate, and they would choose their preferred schemes. It would also not be available through every employer. According to the consultation paper, the facility would be restricted to listed companies, EPFO-registered companies, and AMCs themselves.

For employees, the proposed advantage is mainly convenience rather than access to a new investment product. They can already invest in mutual funds on their own. What changes is that regular investing could be embedded in the salary process, rather than requiring the employee to separately initiate payments from his or her bank account.

A key investor-interest question is whether such payroll-routed investments would be made in Direct Plans or Regular Plans. If the employee is choosing the scheme and the employer is merely facilitating the salary deduction, routing such investments through Regular Plans could mean the employee bears distribution-related costs despite not receiving distributor-led advice.

What are the challenges likely to be?

Allowing a third party to pay for an investor’s mutual fund units creates a key regulatory concern. The person funding the investment is different from the person who owns the units. This raises risks around tracing the source of funds, preventing money laundering and fraud, and avoiding conflicts of interest or mis-selling.

For instance, an employer facilitating salary-linked investments could favour schemes of an affiliated AMC. Similarly, SEBI explicitly flags that allowing an AMC to pay trail commissions to distributors in mutual fund units could create a conflict of interest, potentially leading to mis-selling.

SEBI has therefore proposed safeguards such as robust KYC checks (with clearly defined responsibilities for both AMCs and RTAs), clear written mandates, electronic fund transfers, segregated accounts, regular reconciliation, and a traceable audit trail.

Beyond SEBI’s stated regulatory concerns, a practical operational risk is that the payroll route could also expose employees to a familiar salary-deduction risk. This means situations where money is being withheld from employee pay without timely allotment of the intended mutual fund units. Since mutual funds are market-linked, delayed, or incorrect allotment could also result in an adverse NAV impact, unless the final framework clearly fixes responsibility and compensation.

However, the proposals are still at the consultation stage. The detailed operating safeguards are to be specified by AMFI in consultation with SEBI, and the final framework may differ from what is presently outlined.

Some are calling it India’s 401(k) moment. Is this right?

Not quite, at least not yet. SEBI’s proposal could make mutual fund investing more convenient by allowing employees to route investments through salary deductions. In that limited sense, it introduces a workplace-linked investing channel.

But salary deduction alone does not make an investment facility a retirement system. It only changes how the investment is funded. A 401(k)-type framework is about the broader architecture of retirement savings, including its retirement purpose, incentives, the employer’s role and the rules governing accumulation and withdrawal.

The consultation paper does not propose a dedicated retirement product or specify tax incentives for employees or employers.

Seen this way, SEBI is proposing a change in the plumbing of mutual fund investing, not yet building a new retirement savings architecture. Calling it India’s “401(k) moment” could, therefore, overstate the present proposal, though it may be an early step towards making workplace-linked investing easier in the country.

Published on May 28, 2026