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The Securities and Exchange Board of India (SEBI) issued a new circular on February 26 making sweeping changes in the classification and structure of mutual fund schemes. New categories were also added in these changes made by SEBI, in which guidelines have also been set for contra funds, sectoral debt funds and target based life cycle funds as well as scheme nomenclature, portfolio overlap and asset allocation.
What is its purpose?
Its main objective is to increase clarity and transparency for investors and also to reduce the risk of duplication in multiple schemes. Asset Manager Companies (AMCs) will have to implement these changes in all existing schemes within six months from the date of issue of the circular. Value and Contra Funds SEBI has stipulated that mutual funds can offer both value funds and contra funds, but the condition is that there should not be more than 50 per cent overlap in the portfolios of both. For sectoral and thematic equity schemes, the overlap with other equity schemes of the same category and other equity categories (except large cap schemes) cannot exceed 50 per cent.
What changes were made regarding the naming of the schemes?
SEBI’s circular has also brought clarity regarding the name of the schemes, in which it is necessary that the name of the scheme be commensurate with its category. The regulator has banned the use of words or phrases in the name of the scheme that emphasize only profits, with all schemes continuing to be consistent with their name. SEBI has clarified that changes made merely to meet the naming norms will not be considered as fundamental feature changes. Asset managers will be required to change the name of the scheme in all existing schemes within six months from the date of issue of the circular. This is an order to implement the changes.
What are the new rules for asset management company?
SEBI has now made it mandatory for mutual funds to disclose category-wise portfolio overlap (such as between debt schemes and hybrid schemes between equity schemes and other equity offerings) on their asset management company (AMC) websites to further enhance transparency for investors. These disclosures will have to be updated monthly, which will make it easier to understand the portfolio’s similarities and help investors invest in the right direction.
What kind of initiatives were taken under the Life Cycle Fund?
A flagship Life Cycle Fund has been launched under the new SEBI regulations. This open ended fund is designed for goal based investments. It has fixed maturity period and glide path facility across Equity, Debt, Infrastructure Investment Trusts (InvITs), Exchange-Traded Commodity Derivatives (ETCDs) and Gold and Silver ETFs. Life Cycle Funds can be offered in multiples of five for 5 to 30 years. And the asset manager can have a maximum of six active funds for subscription at any time. If the maturity period of a fund is less than one year, it will have to be merged with the sooner maturing life cycle fund with the consent of the unitholder.
What is the withdrawal fee structure?
To promote financial discipline among investors investing in Life Cycle Funds, SEBI has introduced an exit fee structure in which withdrawal charges will be 3 per cent in the first year, 2 per cent in the second year and 1 per cent in the third year of investment. These funds will follow the benchmark framework prescribed for Multi Asset Allocation Funds and the names of the schemes will include their maturity period, such as ‘Life Cycle Fund 2045’. Life cycle funds with a maturity period of less than five years can take up to 50 per cent equity arbitrage exposure, but the equity investment is required to be within 65 to 75 per cent. Specific asset allocation limits for different fund categories Under the changed rules, specific asset allocation limits have been prescribed for different fund categories. In equity funds, the remaining portion of the fund of the scheme, which is not invested in its main class, can be invested in equities, money market instruments, gold and silver and permitted investments (invented in-house investments) as per the existing regulatory limits. For loan schemes, the remaining portion can be invested in invented in-house investments except overnight, liquid, ultra-short, low duration and money market funds. In hybrid funds, the remaining portion can be allocated in invented in-house investments (except arbitrage funds) gold and silver ETFs within the asset class limit.
What about regional loan fund?
The new circular mentions regional debt funds, which mutual funds can issue only when there is adequate availability of investable loans in the target area. For medium and long term debt funds, fund managers may reduce the portfolio tenure to less than one year in anticipation of adverse movements in interest rates, subject to SEBI monitoring of at least three and four years, not below the minimum portfolio tenure, and required documentation and justification.