Mutual Fund Mis-Selling in India
— Real Cases. Real Losses.

In April 2020, Franklin Templeton India abruptly wound up six debt mutual fund schemes — the Franklin India Ultra Short Bond Fund, Short Term Income Fund, Credit Risk Fund, Income Opportunities Fund, Low Duration Fund, and Dynamic Accrual Fund — without investor consent. Approximately ₹25,000 crore of investor money was frozen overnight, with no redemption allowed.

SEBI's investigation found that Franklin Templeton had been running these schemes with excessive exposure to illiquid, high-risk credit instruments — despite scheme documents suggesting lower-risk investment mandates. The fund house had also charged investors management fees during the period it was taking on undisclosed risk. The Supreme Court of India later directed SBI Mutual Fund to oversee the recovery process.

YES Bank's relationship managers sold Additional Tier-1 (AT-1) bonds to 1,346 retail investors — the majority of whom were existing fixed deposit customers — by describing them as a "Super Fixed Deposit" with guaranteed higher returns and the same safety as an FD. The term sheets were not shared. Risk disclosures were not made. 277 customers were persuaded to prematurely break existing FDs and reinvest ₹80 crore into these AT-1 bonds.

AT-1 bonds are regulatory capital instruments that can be permanently written to zero if a bank faces a crisis. When YES Bank was reconstructed under RBI's emergency framework in March 2020, all AT-1 bonds were written down to zero. The 1,346 investors lost the entire ₹679 crore they had invested.

Axis Mutual Fund's then-head of equities Viresh Joshi, along with associated entities, systematically traded in stocks using advance knowledge of Axis MF's own upcoming large-scale purchases. Because large institutional buy orders move stock prices upward, Joshi's entities would buy first, then sell after Axis MF's order drove the price up — generating risk-free profits at the expense of Axis MF unit-holders who paid a higher price for the same stocks. This practice is called front-running.

SEBI conducted searches of 16 entities and traced a network of coordinated trades from September 2021 to March 2022. The seven affected schemes managed over ₹7,700 crore in investor assets. Axis Mutual Fund suspended both Joshi and co-fund manager Deepak Agarwal after the investigation began.

HDFC AMC invested unit-holder money from several mutual fund schemes into debt instruments issued by the Essel Group of companies, without performing adequate credit due diligence as required under SEBI's Mutual Funds Regulations, 1996. When the Essel Group defaulted and faced a debt crisis in 2019, the NAV of the affected HDFC schemes fell sharply, with investor money at risk.

SEBI found that HDFC AMC had not maintained the level of due diligence expected of a responsible fund house before making these investments. The regulator also noted inadequate monitoring of the portfolio concentration risk in Essel Group securities. HDFC AMC chose to settle the matter through a consent order rather than contest the SEBI proceedings.

SEBI documented a widespread industry practice in which distributors across India recommended investors switch out of existing, well-performing funds into New Fund Offers (NFOs) — not because the NFO was better, but because switching generated a fresh upfront commission for the distributor, whereas simply staying in the existing fund earned only a lower trail commission.

Each switch incurs exit loads (if within the exit load period), restarts the holding period for long-term capital gains tax (LTCG) purposes, and forces investors to redeem at potentially unfavourable times. The investor loses. The distributor earns. SEBI identified this as a structural conflict of interest embedded in the Regular plan commission model and introduced a regulatory fix in December 2024.

SEBI's AI-powered surveillance system identified a pattern in which distributors were selling small-cap and sectoral mutual funds to investors in their 70s and 80s — a demographic whose typical risk profile (capital preservation, income stability) is wholly incompatible with the high volatility and long investment horizon required for small-cap funds to work.

SEBI reached out to several Asset Management Companies to investigate whether their distribution networks had sold these high-risk products to elderly investors without completing proper suitability assessments. The regulator noted that in many flagged cases, investor profiles on file were inconsistent with the risk level of the purchased scheme — suggesting that either the suitability check was fabricated or was never conducted.