Mis-selling of mutual funds is not just bad advice, in many cases, it is a legal violation.
Indian law recognises that most investors do not have equal knowledge or bargaining power, and therefore places strict duties on those who sell and manage mutual funds. This article explains what mis-selling is, when it becomes illegal, who is liable, and how SEBI acts against it, in clear, non-technical language.
What Is Mis-Selling of Mutual Funds?
Mis-selling happens when a mutual fund is sold to an investor by:
- Misrepresenting facts
- Hiding risks
- Ignoring suitability
- Making false or exaggerated return claims
In law, the problem is not loss — the problem is unfair or deceptive conduct.
When Does Mis-Selling Become Illegal?
Mis-selling crosses into illegality when it violates statutory duties imposed by Securities and Exchange Board of India (SEBI).
Common legally recognised forms of mis-selling:
- Selling high-risk funds to conservative investors
- Presenting mutual funds as “safe” or “guaranteed”
- Suppressing risk disclosures
- Pushing regular plans without disclosure of commissions
- Churning portfolios for higher commissions
These acts breach disclosure, suitability, and fiduciary obligations.
Who Is Legally Liable for Mis-Selling?
Mutual Fund Distributors
Distributors can be held liable if they:
- Misrepresent schemes
- Fail to disclose commissions
- Ignore suitability norms
They are governed by SEBI (Mutual Funds) Regulations, 1996 and SEBI circulars.
Investment Advisers
Registered Investment Advisers (RIAs) have higher legal duties.
They must:
- Act in the best interest of clients
- Provide suitable advice
- Avoid conflicts of interest
Failure can lead to registration cancellation and penalties.
Asset Management Companies (AMCs)
AMCs may be liable if:
- They encourage aggressive or misleading sales practices
- Their disclosures are misleading
- They fail to supervise distributors properly
Law recognises that investor protection cannot be outsourced entirely.
Role of SEBI in Addressing Mis-Selling
SEBI actively intervenes through:
Regulations & Circulars
- Suitability requirements
- Standardised risk-o-meters
- Advertising and performance norms
Surveillance & Inspections
SEBI conducts:
- Audits of AMCs and distributors
- Review of sales practices
- Monitoring of complaints
Enforcement & Penalties
SEBI has powers to:
- Impose monetary penalties
- Suspend or cancel registrations
- Issue corrective directions
- Bar individuals from the securities market
These actions are taken in the interest of investors, not merely as punishment.
I Was Mis-Sold A Mutual Fund — What Can I Do? (What steps to take)
If a mutual fund was sold to you by hiding risks, misrepresenting safety, or ignoring your profile, you can take the following steps:
Identify mis-selling
Check if the fund was presented as safe/guaranteed, risks were downplayed, or commissions were not disclosed.
Collect proof
Save emails, messages, application forms, risk profiling records, and advertisements.
Complain to the AMC or distributor
Raise a written complaint with the mutual fund house or adviser first.
Escalate to SEBI (SCORES)
If unresolved, file a complaint with Securities and Exchange Board of India through its SCORES platform.
Know what to expect
SEBI addresses regulatory violations, not market losses. Relief depends on facts.
Frequently Asked Questions (FAQs)
1. I lost money in a mutual fund — does that automatically mean mis-selling?
No. Loss alone is not mis-selling.
Mis-selling exists only if the mutual fund was sold using misrepresentation, non-disclosure, or unsuitable advice. Market risk and poor performance by themselves are not illegal.
2. Is it mis-selling if my distributor said the fund was “safe”?
Yes, it can be.
If a mutual fund—especially an equity or high-risk scheme—was described as “safe”, “fixed”, or “guaranteed”, it may amount to misrepresentation, which is legally actionable.
3. Can I complain to SEBI if I was mis-sold a mutual fund?
Yes.
An investor can file a complaint through SEBI’s official grievance mechanism (SCORES) against:
- The distributor
- The AMC
- Or any registered intermediary
SEBI examines whether regulatory obligations were violated, not whether the investment made profits.
4. Are regular plans illegal or a form of mis-selling?
No. Regular plans are legal.
However, mis-selling arises if:
- Distributor commissions were not disclosed, or
- The investor was not informed about the availability of a direct plan, or
- The regular plan was recommended without considering suitability
Transparency is the legal requirement.
5. Who is legally responsible for mis-selling — the distributor or the AMC?
It depends on the facts.
- Distributors are liable for misleading advice or concealment
- AMCs may be liable if they fail to supervise distributors or allow misleading practices
- Investment advisers have higher fiduciary duties and stricter liability
SEBI can proceed against one or multiple parties based on involvement.
