This article deals with the functionalization of a triblock copolymer, poly-(styrene-ethylene-co-butylene)-styrene (SEBS), at the mid-block by means of chemical grafting by two polar moieties-acrylic acid and maleic anhydride and subsequent novel synthesis of nanocomposites based on hydrophilic montmorillonite clay (MT) at very low loadings. The mid-block was grafted with 3 and 6 wt% acrylic acid through solution grafting and 2 and 4 wt% maleic anhydride through melt grafting reactions which were confirmed by spectroscopic techniques. The nanocomposites derived from the grafted SEBS and hydrophilic MT clay conferred dramatically better mechanical, dynamic mechanical, and thermal properties as compared to those of the original SEBS and its clay-based nanocomposites. Different phase separated morphologies could be observed from transmission electron microscopy (TEM) and atomic force microscopy (AFM) studies for grafted SEBS. X-ray diffraction (XRD), AFM, and TEM studies revealed better interaction and dispersion of MT clays with the grafted SEBS matrix, resulting in better transparency of these nanocomposite films. Superlative enhancement of thermal degradation properties was achieved with maleated and acrylated SEBS-MT nanocomposites. Thermodynamic calculations and interfacial tension measurements indicated possible ways of favorable intercalation-exfoliation mechanism of maleated and acrylated SEBS-MT nanocomposites.