We have noticed many regulatory changes in the mutual fund industry in the upcoming year, which is about to end soon. In an attempt to make mutual funds more transparent for traders and investors, SEBI came up with some changes which will remain applicable in the new year 2021.
Here is a list of changes that will come into effect in Jan 2021.
1. Changes in portfolio allocation rules for multi-cap funds:
SEBI announced portfolio allocation rules for multi-cap mutual fund schemes. As per the new rules made by SEBI, a mutual fund scheme will have to invest at least 75% in equities and equity-related investments. In addition to this, the schemes will have to invest in a minimum of 25% each in small-cap, mid-cap and large-cap stocks. At present, there is no such restriction allocation and therefore fund managers are allowed to invest in the mid-cap as per their own choice.
All mutual fund houses were given time till 31 January 2021, to comply with the fresh rules, within the one month from the date of publishing the next lists of stocks by AMFI. Following concern in the industry, the SEBI later introduced a new mutual fund category called flex cap fund, which is required to invest at 65% of the corpus in equity without any restrictions on investing in small-cap, mid-cap or large-cap funds. Some AMCs have already reclassified their multi-cap schemes as Flexi cap category to avoid any portfolio changes.
2. Changes in NAV Calculation
From January 1, 2021, mutual fund investors will get the purchase NAV of the day, when investors’ money reaches the AMC, irrespective of the size of investments. This NAV rule will be applicable only for those funds which are available for utilization irrespective of the name and size of the application.
Under the prevailing rules, the NAV of the date of purchase is considered for the purchase of less than Rs 2 lakh, even if the money does not reach the AMC, but the order is placed within the cut off time.
3. Inter Scheme Transfer of Securities
According to the sources, inter scheme transfer (IST) of debt papers can only be done within 3 business days of the allotment of the schemes’ units and after three business days, such transfer will not be allowed. Under prevailing rules, SEBI only requires that such IST be done at the market prices.
From January 1, 2021, inter scheme transfer in closed-ended funds can be done within 3 business days as the scheme transfers involve shifting of debt papers from one mutual fund scheme to another.
Moreover, SEBI also specified that such ISTs be done only at the market places and no ISTs shall be allowed if there is any negative market news or rumours in the mainstream media.
4. Renaming the dividend option
From April 1, 2021, mutual fund schemes comprising all the dividend schemes will be renamed as income distribution cum capital withdrawal options.
5.New Riskometer Tool
SEBI introduces a new category of mutual fund schemes on its riskometer tool for investors to make better decisions with high-risk mutual funds. Earlier, the model was simply based on the risk of the category without considering its actual portfolio. The new riskometer shall be evaluated every month and all schemes will be labelled for risks and funds.
Additional Measures Under Consideration
SEBI is considering additional measures which are expected to be implemented with the mutual fund industry. Here are some of them:
- It is mandatory to maintain a minimum 10% exposure in liquid assets such as government securities, treasury bills, and cash in hand.
- Gating of redemption during extreme events to prevent any pressure on the fund.
- Do assessment whether the side pocket creation norms need to be revised.
- Stress testing for all open-ended debt oriented mutual fund schemes will raise early warning signs and enable AMCs to take necessary actions.
- Encourage repo in corporate bonds to raise liquidity in the secondary market and to enable greater issuance of paper rated below AAA.