Picture this: a market-wide liquidity crunch hits, and your client, holding a significant corpus in a debt-oriented mutual fund, calls you in a state of panic because they have read a news report about the AMC restricting redemptions. You must explain that this is not an arbitrary decision made by a fund manager in a hurry, but a heavily regulated emergency measure.
Under SEBI guidelines, the decision to impose a limit on redemptions is a profound step that requires the explicit approval of the Board of the Asset Management Company and the Board of the Trustees. These boards must be convinced that the market crisis is of such a systemic nature that a run on the fund would irreparably harm the remaining investors, necessitating an ’emergency brake’ to preserve liquidity.
In your practice, understanding this approval process shifts your role from a passive reporter to an informed source of stability. When an AMC identifies that the market environment—such as a series of bond market failures or a breakdown in settlement infrastructure—makes it impossible to liquidate assets without causing deep losses, they prepare a formal proposal for their boards. This proposal must detail the extent of the liquidity problem and justify the duration of the restriction.
For an MFD, being able to articulate that this is a multi-layered governance decision rather than an impulsive operational move helps maintain client trust during stressful market cycles.
Consider the practical implications for your client’s portfolio. If a restriction is approved, it applies to redemptions exceeding a certain threshold, typically INR 2 lakh, for a period not exceeding 10 days in any 90-day window. This ensures that smaller, retail investors are largely unaffected, while large institutional redemptions are tempered to prevent a fire sale of the fund’s underlying assets.
By explaining this, you help the client understand that the regulation acts as a protection mechanism against the collective panic of others. While direct plans may offer lower expense ratios, the hand-holding and calm, technically accurate explanation you provide during such crises is the core value that justifies your role in the client’s financial journey.
Always remember that these restrictions are not tools for managing poor investment performance or security-specific downgrades, which fall under the scope of segregated portfolios. They are strictly for systemic market events where the entire industry’s liquidity is compromised. Keeping this distinction clear prevents unnecessary alarm and underscores your professionalism as a well-informed distributor.
Nuance
Check Your Understanding
When a mutual fund scheme faces extreme systemic market stress, who must provide the mandatory approval before the AMC can impose redemption restrictions?
An AMC identifies a systemic liquidity crisis and receives board approval to restrict redemptions. What is the maximum duration per 90-day period that these restrictions can be in effect?
This is a companion read for Section 10.8 — Certain Provisions with respect to Credit risk from Ace the NISM Mutual Fund Distributors Exam by Akhilesh Gururani, available on Amazon Kindle.
Copyright © 2026 Akhilesh Gururani. All rights reserved.