In the present times, it has become increasingly important to prevent money laundering, and terrorist financing. Given the large amount of monetary dealings and money exchanging hands on everyday basis in the equity and debt markets, action was necessary in order to prevent exploitation of this channel.

Prevention of Money Laundering Act, 2002 (PMLA) came into effect from July 1, 2005 and consequently SEBI mandated that all financial institutions and banks (which includes Mutual Funds) should formulate and implement a proper policy framework as per the guidelines on anti money laundering measures, and also adopt a Know Your Customer (KYC) Policy.