SEBI proposes 5 major changes for demat mutual fund investors, what you should know

SEBI aims to simplify the redemption process for mutual fund holders in demat accounts by introducing automated standing instructions. SEBI has released a consultation paper to introduce standing instructions for Systematic Withdrawal Plans (SWP) and Systematic Transfer Plans (STP) for mutual fund units held in demat form.​

What Is SEBI Proposing?

SEBI wants demat investors to be able to:

• Set up automatic, recurring withdrawals (SWP) from their mutual funds.
• Set up automatic, recurring transfers (STP) from one mutual fund scheme to another.

Once registered, these instructions will keep running automatically until:

• You cancel them, or
• The mandate expires, or
• Your holdings in that scheme become zero.​

This facility is already available when you hold mutual funds in statement‑of‑account (SOA)/folio mode. The proposal is to extend the same convenience to demat holders.​

SWP & STP simplified

Before we go deeper, let’s quickly understand the two terms SEBI is talking about.​

• Systematic Withdrawal Plan (SWP):

  You instruct the mutual fund to redeem a fixed amount or a fixed number of units at regular intervals (monthly, quarterly, etc.). The money comes to your bank account regularly often used like a ‘monthly income’ from investments.​

• Systematic Transfer Plan (STP):

  You instruct the mutual fund to regularly move money from one scheme to another within the same AMC (Asset Management Company. For example, from a liquid fund to an equity fund, or from an equity fund to a debt fund.​

These instructions can also be customised. You can set them to:​

• Transfer/redeem only the appreciation (profit).
• Gradually increase or decrease the amount over time.

How will it work for Mutual Fund investors?

These features are already used when units are held in physical or non-demat. There are mutual fund investors who invest in the physical or non-demat mode

The AMC creates a folio number, which acts like your account number with that fund house. All your purchases, redemptions, SIPs, SWPs, and STPs in that AMC are recorded against this folio number, and you get statements of account (SoA) to show your holdings.

In this setup, investors who hold mutual funds in physical or non-demat mode, can register a SWP or STP just once with the mutual fund company (AMC) or its Registrar & Transfer Agent (RTA). A Registrar & Transfer Agent (RTA) is a service provider that manages the record-keeping, transfer, and processing of mutual fund units and securities on behalf of the Asset Management Company (AMC).  

After that the AMC/RTA keeps executing those periodic withdrawals or scheme‑to‑scheme transfers automatically on the chosen dates, without the investor having to give fresh instructions every time.

What is the problem today for demat MF holders?

The issue arises when units are in demat. As for demat investors who hold their mutual fund units in a demat account through a broker have to manually place separate instructions or give legal permissions to broker for every SWP or STP leg. It makes recurring withdrawals and transfers far more tedious and operationally heavy for them.

SEBI’s latest consultation paper aims to close this gap and make life easier for people who hold mutual fund units in demat form.​

How it currently works for demat mutual fund investors?

If you hold your mutual fund units in demat form, there is no standing SWP/STP facility as of now.​

Instead, every time you want to withdraw or transfer, you must give a fresh instruction. This typically works like this:​

• You submit a Delivery Instruction Slip (DIS) to your Depository Participant (DP) for each transaction, or
• You give an online instruction with two‑factor authentication through your DP, or
• You authorise your stockbroker via Power of Attorney (PoA) or Demat Debit and Pledge Instruction (DDPI) so they can act on your behalf.​

Each SWP/STP leg becomes a separate transaction. 

That means:

1. More effort and time for recurring needs like monthly withdrawals or phased transfers.

2. If you rely on PoA, your broker gets more operational power over your demat holdings, which reduces your direct control – something SEBI is increasingly cautious about.​

    

The current STP flow for demat units 

SEBI’s paper explains the existing process using an STP example:​

1. You tell your DP (via DIS or online) to sell units of Scheme X and buy units of Scheme Y.

2. The DP passes this to your stockbroker, who places the orders on the stock exchange.

3. Once the broker executes the trades, units being sold move from your demat account to the clearing corporation (CC) for settlement.​

4. After settlement, the CC and RTA reconcile the trades, and the new units are eventually credited to your demat account.​

5. The RTA updates the folio records for both the buy and sell legs.​

For SWP in demat, a similar multi‑step process happens each time, with the redemption amount credited to your bank account, and units extinguished through corporate action.​

So, if you want a monthly STP or SWP, this entire chain repeats every month. That’s the friction SEBI is trying to remove.

Why Has SEBI Proposed This Change?

SEBI clearly highlights two big reasons for its proposal:​

1. Better cash‑flow and investment planning for investors

   • Standing SWP/STP instructions help investors automate regular withdrawals and transfers, making financial planning smoother.

   • This benefit is currently available only when units are held in SOA/folio mode, not in demat.​

2. Ease of Doing Business (EoDB) for the MF ecosystem

   • Repeating manual instructions for each transaction creates operational load for investors, depositories, brokers, RTAs, and exchanges.​

   • SEBI believes extending standing instructions to demat holdings will simplify operations and remove unnecessary friction for all stakeholders.​

What is SEBI’s plan to implement this?

To design the framework properly, SEBI set up a working group with representatives from stock exchanges, depositories, and RTAs.​
This group looked at:​

• How to register SWP/STP in depository/RTA/exchange systems.
• Which standard fields are needed.
• Variants that should be allowed (fixed units, fixed amount, capital appreciation, etc.).
• How cancellation/termination will work.
• How information should flow between depositories, RTAs, and exchanges.

Based on their recommendations, SEBI’s Secondary Market Advisory Committee (SMAC) discussed the proposals in November 2025 and suggested a two‑phase implementation.​

How will the new framework work?

SEBI proposes to roll this out in two phases so that the basic functionality goes live sooner, and advanced features follow later.​

Phase I: Basic, unit‑based SWP/STP through depositories & exchanges

In Phase I, the focus is on getting a workable, unit‑based standing instruction system live with minimal disruption.​

• Who maintains the mandates?

  • Depositories and stock exchanges will maintain the registrations of SWP/STP mandates and trigger them on the relevant dates.​

• Where can you register a mandate?

  • With your depository (online or via physical instruction), or
  • Through members of stock exchanges (your broker).​

• What type of SWP/STP is supported?

  • Mainly unit-based, specific date SWP/STP. For example, ‘redeem 50 units on the 5th of every month’​‑based, specific‑date SWP/STP
  • This is only a subset of all possible SWP/STP variants but is easier to implement quickly.

• How is it processed?

  • Once the mandate is registered, execution will be carried out via stock exchange platforms, using existing reporting flows to RTAs.​

SEBI lists the advantages of Phase I:​

• RTAs don’t need to do major system changes, only depositories need development.
• It simply extends the existing automatic SWP/STP system used for folio holdings to mutual fund units held in demat form.
• Registrations and triggers are handled by exchanges and depositories, who already manage transaction flows.
• No extra corporate action charges are payable by AMCs for this arrangement.

In simple terms, Phase I brings a basic automatic SWP/STP option for demat investors quickly, without big changes for all the players in the market.

Phase II: Advanced, amount-based & custom variants via RTAs

In Phase II, SEBI wants to unlock the full range of systematic options and not just unit‑based ones.​

• Who controls the triggers?

  • As the final processing of standing instructions happens at the MF/RTA, the triggers for execution can be handled by RTAs and/or stock exchanges.​

• What new variants are possible?

  Phase II allows much richer functionality, such as:​

  • Amount-based SWP/STP (e.g., ₹10,000 per month instead of 50 units).
  • Appreciation-based switches (only transfer profits).
  • Swing STP and other more advanced, market-linked variants.

• Investor experience:

  • From the investor’s point of view, there should be no major change in experience, you continue interacting with your member/depository as you do today.​

The expected benefits of Phase II:​

• It supports both amount‑based and unit‑based SWP/STP.
• It opens the door for multiple advanced systematic strategies.
• It does this while keeping the front‑end investor experience largely the same.

Subject to public feedback

This proposal is still a consultation paper, SEBI has invited comments from investors, intermediaries, and other stakeholders.​

SEBI has specifically asked whether stakeholders agree with:​

• Extending standing SWP/STP to demat‑held mutual funds.
• The registration process proposed for such mandates.
• The execution process via stock exchange platforms.
• The detailed procedure suggested for Phase II.
• Implementing the framework in two phases
• Any additional suggestions or concerns on the proposed framework.

The proposal is essentially about fairness and convenience. If physical or non-demat mode investors can seamlessly run SWP/STP, demat investors should not be left behind.​

If implemented well, this framework can make demat a more attractive and flexible way to hold mutual funds, especially for investors who prefer everything under a single demat umbrella.