Imagine one scenario. A 27-year-old marketing professional from Mumbai learned about the power of compounding of Systematic Investment Plans (SIPs). He wanted long-term exposure to equities through mutual funds. Like many first-timers, he went to a bank to set up an SIP in a direct mutual fund scheme to achieve the same. Instead, his bank relationship manager convinced him to buy a special plan that promised “assured returns” with market upside. Weeks later, he discovered that he had been sold a regular mutual fund plan with hidden commissions, not the direct plan he originally asked for.
This is how mis-selling of a mutual fund happens, and it is not an isolated story. Many investors, especially beginners, fall into similar traps. To avoid ending up in the same boat, it’s crucial to learn about mis-selling, how to spot it early, and where you report it. Here we go!
What is mis-selling of a mutual fund?
Mis-selling of a mutual fund happens when you are offered a mutual fund scheme that isn’t aligned with your actual financial needs: financial goals and risk appetite. You may want high returns, but what you truly need is stability. You may want quick results, but your goals may require long-term planning. Mis-selling happens when someone takes advantage of that gap and puts your financial well-being at risk.
A simple analogy would be this. You walk into a clothing store looking for a cotton t-shirt for casual wear. The salesperson convinces you to buy a designer jacket instead, which is expensive and impractical for daily use. It won’t serve your actual purpose, but you walk out thinking you got a great deal.
It’s a little sales trick, with mis-selling of mutual funds being a more polished version of the same trick. You walk in with trust, expecting the right advice, but instead, the seller’s commission-driven interests overshadow the investor’s interests.
Who regulates mutual funds in India?
Before we get into how to identify mis-selling, it helps to know who’s responsible for protecting investors like you.
In India, the Securities and Exchange Board of India (SEBI) regulates the mutual fund industry. Every asset management company (AMC), mutual fund distributor (MFD), financial advisors, and banks selling mutual fund schemes must comply with SEBI’s rule. SEBI’s role is to protect investors’ interests and ensure fair practices across the industry.
Also read: Why Should You Only Work with a SEBI Registered Investment Advisor?
How to identify mis-selling of a mutual fund scheme
You have got the basics. Let’s look at how you can spot the warning signs early and avoid being mis-led.
1. Unauthorised switch transactions
Unauthorised switch transactions happen when your investment is moved from one mutual fund scheme to another without your clear consent or knowledge. This is often done by intermediaries like mutual fund distributors or bank relationship managers.
What is the reason behind this? Akhil Rathi, Head – Financial Advisory at 1 Finance and a SEBI Registered Investment Adviser (RIA) said,
“Mutual Fund Distributors (MFDs) earn trail commissions from Asset Management Companies (AMCs) based on the assets they mobilise and continue to manage, and their income can rise when clients’ investments are shifted into schemes that carry higher payout structures. A frequent pattern is observed during the launch of new fund offers (NFOs), where distributors often highlight the potential growth story or unique positioning of the scheme to persuade investors to move money from existing funds, even though the long-term benefits may be uncertain.”
He added, “While this practice helps increase distributor earnings, it does not always align with the client’s best interests. Unlike Registered Investment Advisers (RIAs), who are required to maintain detailed documentation of their advice, justify suitability, and obtain explicit client approval before making portfolio changes, MFDs function under lighter compliance rules, making such switches easier to implement without comprehensive justification or prior authorisation.”
Let’s imagine you invested in a debt mutual fund, aiming for stable and low-risk returns. A few months later, while checking your account statement, you notice your money was transferred into an equity fund without your approval. This is an unauthorized switch transaction.
How to protect from unauthorised switch transactions in mutual funds
- Sign transaction slips only after verifying all details.
- Never leave blank signed slips with intermediaries like mutual fund distributors.
- Fill out forms yourself instead of relying on the officials.
- Strike off any blank sections before signing and submitting.
- Monitor your investments and account statements regularly.
- Avoid sharing your login credentials and OTP with anyone.
2. Giving misleading information about a mutual fund scheme
When someone spins the facts or straightaway twists the truth about a scheme, that’s the process of providing misleading or falsifying information to investors. This involves exaggerating benefits or downplaying risks to make that scheme look better than it really is.
Your agent will reassure you about a specific scheme, emphasizing its risk-free nature due to the investment in large-cap stocks. Large-cap stocks (aka blue chip companies) can take a hit during volatile markets too. Calling them “risk-free” is misleading.
How to protect yourself from this:
- Always read about the scheme information document (SID) before buying into absolute claims.
- Understand the scheme’s risk profile.
- Check the fund’s historical performance on the AMC.
- Do your research before blindly investing.
3. Hiding important details about the mutual fund scheme
When the key information about the fund gets swept under the rug, that’s concealing. Details like high fees, associated risks, or surrender charges may stop you from investing or make you think twice. In the end, this concealment can cost you more money or leave you stuck when you want to exit.
An agent might highlight the returns but completely ignore the exit load or high fund management fees involved. These hidden costs can eat into your returns or restrict your flexibility.
How to protect yourself from the trap
- Ask about fees, lock-in periods, and penalties upfront.
- Verify fund details on the AMC’s official site.
- Don’t rely on verbal promises.
4. Pushing unsuitable mutual fund scheme
This happens when investors are encouraged or pushed aggressively to buy mutual funds that don’t match their financial goals, risk tolerance, or life stage. Imagine if you are being sold a winter coat in summer. Will that work? The case is similar to mutual funds.
Senior citizens, who usually prefer low-risk investments, get pushed into high-risk small-cap or mid-cap funds that can swing wildly. These poor matches can cause financial losses and unwanted stress.
How to protect from product unsuitability?
- Always be clear about your financial goals.
- Check if the fund matches your risk comfort and time horizon.
- Get a second opinion if you are unsure.
5. Switching from the existing fund to NFO
Mis-selling here happens as investors are persuaded into exiting their existing, suitable mutual fund scheme to a seemingly lucrative new fund offer (NFO), often due to high commissions or sales targets tied to NFOs. You are exposed to unnecessary risk of underperformance, as there’s no historical track record of that scheme. Plus, this increases MFDs’ income that they earn through trail commissions.
For example, you are abandoning your reliable, well-functioning car for a new, shiny one, without a slightest idea about how the new car will perform. There’s a risk here!
How to protect yourself from this?
- Don’t rush or fall for the buzzwords like “limited deal” or “exclusive”.
- Ask the reason behind the switch.
- Check if you have schemes offering similar goals.
- Stick to your current financial plan that aligns with your goals.
6. Selling too many schemes in the portfolio
Holding a long list of funds increases overlap and dilutes the asset’s potential. This further increases the overall costs (adding up all expense ratios), including taxation when you realize the gains. From MFD’s perspective, when investors add multiple schemes, they see higher assets under management (AUM), meaning higher commissions.
For example, if your portfolio already has a diversified mixture of an equity fund, debt fund, and some exposure to gold, then adding a multi asset allocation fund (MAAF) is just redundant. You are only “over-diversifying” the already well-diversified portfolio!
How to protect yourself from this?
- Define your goals clearly and align schemes as per them.
- Stick to managing up to a certain number of schemes, usually 4-5 schemes are preferable.
- Review your portfolio regularly to check if there are schemes with similar purposes.
- Check our Mutual Fund Overlap Calculator to avoid duplication of schemes.
In case of confusion, a Qualified Financial Advisor (QFA) who will guide you through the process.
Steps to report mis-selling of a mutual fund
Remember this: Knowledge is your strongest defence. Once you identify that you are being mis-sold, you can report it to the appropriate officials with the following steps.
Step 1: Collect proof of mis-selling
You must collate all necessary documents used during the investment journey. Having documents strengthens your complaint. Those documents can be:
- KYC acknowledgment or any signed application form.
- Screenshots of emails, WhatsApp chats, etc.
- Any brochures or marketing material used to convince you.
- Account statements of the transactions.
Step 2: Start with the mutual fund distributor
You can approach the mutual fund distributor in writing. Clearly state what was promised at the time of investing and what you actually got.
Step 3: Escalate to the AMC
If you receive zero silence from the mutual fund distributor, reach out directly to the AMC’s investor grievance cell. Each AMC has a compliance officer and investor helpdesk found on their official websites. Keep copies of the necessary documents if possible.
Step 4: File a complaint on SCORES
SEBI runs SCORES (SEBI Complaints Redress System), an online platform for investors to resolve their grievances. There, you need to register yourself, lodge your complaint, and submit supporting documents. SEBI will direct the concerned AMC to respond. You can also track the complaint online.
Step 5: Reach out to the Association of Mutual Funds in India (AMFI)
AMFI is the self-regulatory body in India that oversees the proper functioning of the mutual fund industry. SEBI acts as a regulator, while AMFI ensures ethical practices among members.
AMFI’s grievance redressal mode:
Step 6: Approach the Ombudsman or the consumer court
If your complaint is still unresolved, you can approach the Ombudsman or even a Consumer Court for compensation. This is rare but possible if you suffered financial loss due to proven mis-selling.
Quick references for reporting mis-selling in mutual funds
Conclusion
Mis-selling thrives on a lack of awareness. The more you know, the less likely you will be taken for granted. If you have already been mis-sold, don’t hesitate to document, report, and escalate your complaint. Protect your money at all costs.
