SEBI recently declared one of the biggest convenience-based changes for mutual fund (MF) investors holding units through a demat account with the market regulator allowing investors to set up standing instructions for systematicwithdrawals and systematic transfers to a mutual fund (MF) units in the dematerialised (demat) form.
The new initiative wants to make these easier and will enable adoption of demat based mf holdings which will be closer to the existing facility of units in SoA form. This in to be implemented in phases over a period till April 2027.
SEBI SWP and STP facility to demat mutual funds
Previously investors who were holding the mutual fund units in the demat account were not able to do the direct Systematic transactions, be it SWP or STP which could be easily done in cases where the mutual fund units were held in SoA form through the AMCs or RTAs but in the case of the units held in the demat account.
To plug this loophole, SEBI has recently taken a step forward. Under the new scheme, now investors will be able to provide systematic instructions for mutual funds in demat form, instead of instructions relating to the units. This is expected to give investors enhanced transaction comfort.
The move has come after representations from depositories, a recommendation from a working group formed by SEBI and suggestions from the regulator’s Secondary Market Advisory Committee.
What is SWP and how will the new rule help?
A Systematic Withdrawal Plan (SWP) is a facility that enables an investor to withdraw a fixed amount or fixed number of mutual fund units at regular intervals. SWP is mostly used by investors planning regular cash flow from mutual fund investment, especially in case of retirement planning and requirement.
In the new SEBI scheme, the investors who hold mutual fund units in the demat account will be able to setup standing instructions for systematic withdrawals. This will automate the process of withdrawals in which the investors will not be required to make every time an explicit request.
For instance, an investor may have a periodic requirement to redeem fixed units from a mutual fund investment. The framework will be able to facilitate such instructions through the relevant depository mechanism when the facility is available.
What is STP and why is it important?
Systematic Transfer Plan: With a STP, investors can transfer investments (money/units) from one mutual fund scheme to other at a pre-specified time interval. Investors also use STP to shift funds from a relatively low risk fund to an equity-oriented scheme or vice versa.
Making the STP standing instructions available for demat-held MF units can help investors maintain a consolidated demat account for all their investments, and manage their portfolios more efficiently.
This is especially applicable as more investors are now holding their assets in dematerialised form. OnDemat mutual fund has been now brought under the SWP and STP umbrella making the two more uniform in SoA and Demat forms.
SEBI to roll out the services in two stages
The new facility will be implemented in two phases.
Phase I: Investors will be able to set up recurring instructions for unit based SWPs and STPs, that is SWPs and STPs that are based on a fixed number of mutual fund units
Phase 2: The facility will be extended by introducing amount based SWPs and STPs where instruction is given in terms of a fixed rupee amount.
As reports, unit based facility is projected to go live by January 2027 and amount based facility is projected to go live by April 2027. This staged implementation is to enable market infrastructure institutions and depositories to adopt the necessary technological and operational changes.
Significance of this SEBI decision for mutual fund investors
Offering in the new mode will help a lot for investors holding units of mutual funds in their demat accounts. They can now instruct the installments of their investments to be made automatically.
This step will also go a long way toward bridging the gap between the experience of holding mutual fund units in demat form and through the traditional statement of account route, especially as investors seek an overall view of their financial assets.
For investors having demat accounts and holding several securities, the abilility to give them SWP and STP mandates would have added to their ease of operations. These will also make cash flow management, portfoilo transfers and retirement planning simpler.
A wide effort to make doing business easier.
SEBI’s move is in continuation of a larger attempt to streamline procedures and processes related to securities and mutual fund ecosytem. As digital investing booms in popularity, the investors are waiting to experience the same ease of operation and some similarity while dealing with other formats of investments.
In terms of operational convenience, the initiation of SWP and STP standing instructions for mutual fund units in demat accounts is a significant step forward. And, clearly demonstrates the regulator’s intent of enhancing investor convenience.
Nevertheless, investment banks should bear in mind that the new facility shall be rolled out in stages. The procedure, timeline and other arrangements shall be as per the implementation structure adopted by the depositories and other market players.
Bottom line
SEBI makes an entrance. With SEBI’decision to enable SWP and STP standing instructions for mutual fund units held in demat investors , India enters an era of evolved, affordable and technology driven mutual fund investing. The phased launch ( first for unit based and then for amount based instructions) should go a long way in giving demat investors more power to control systematic withdrawal and transfer instructions.
Once ready by April 2027, Investors into mutual funds may have a more B2B automated end-to-end process to manage the portfolios, taking demat-based mutual fund investments to a close proximity with the Statement of Account route.
