Sebi Overhauls Mutual Fund Schemes: Key 10 Changes to Know
The Securities and Exchange Board of India (SEBI) has recently announced a major overhaul of the categorisation and rationalisation rules for mutual fund (MF) schemes. These changes aim to enhance transparency, reduce overlap, and provide clearer investment choices for investors. Here are the top 10 key changes introduced by SEBI:
Discontinue Solution-Oriented Funds
The category of solution-oriented funds stands discontinued from the date of the circular. Existing schemes under this segment will stop accepting fresh subscriptions immediately. These schemes will be merged with others having similar asset allocation and risk profiles, subject to prior approval from SEBI. According to Nitin Agrawal, CEO of Mutual Funds at InCred Money, “Solution-oriented funds take a hit. Most of these funds were not true to label, and their portfolio construction was mainly in line with other funds, not providing a more true-to-label solution.”
Introduction of Life Cycle Funds
A new category of MF schemes called life cycle funds has been introduced. These will be open-ended funds with attributes of predetermined maturity and a glide path for goal-based investing. Nilesh D Naik, Head of Investment Products at Share.Market (PhonePe Wealth), stated, “Introduction of the Life Cycle Funds category is a great initiative to promote long-term disciplined investing. If these funds become popular, their long-term nature has the potential to contribute to the stability of the stock market.”
AMCs to Have Both Value and Contra Funds
Asset Management Companies (AMCs) will be permitted to offer both Value and Contra funds, provided that the portfolio overlap between the two schemes does not exceed 50%. Niharika Tripathi, Head of Products and Research at Wealthy.in, noted, “Value and Contra funds exist across different AMCs, and some historical comparisons showed portfolio overlap in some cases of around 40% to 50%, despite being distinct styles. The revised framework now permits an AMC to offer both Value and Contra funds, while capping portfolio overlap at 50%, ensuring clearer differentiation in strategy and more meaningful product choices for investors.”
Mandatory Monthly Disclosure of Category-Wise Portfolio
AMCs will be required to disclose category-wise portfolio overlap levels on a monthly basis. This disclosure will be published on the AMC's website for investor communication. Nitin Agrawal emphasized, “Monthly overlap disclosure will bring in greater transparency in terms of overall exposure across various schemes and will help investors avoid over-diversification across schemes with similar underlying exposure.”
Equity MFs to Invest Residual Portions in Different Instruments
Equity mutual funds will now have the flexibility to invest residual portions in a variety of instruments, including equity, money market instruments, liquid instruments, gold and silver instruments, as permitted by SEBI, and in Infrastructure Investment Trusts (InvITs), subject to the ceilings laid out in MF regulations with respect to the respective asset class.
Cap on FoF Launch
The circular specifies the number of Fund of Funds (FoF) schemes permitted to mutual funds. If a mutual fund has more FoF schemes under any particular category than the number of FoFs permitted under the specific sub-category, such FoFs will be grandfathered.
Sectoral Debt Fund
The introduction of sectoral debt schemes will be subject to the availability of investment-grade paper in the market for the sectors in which the sectoral debt fund is offered by the respective AMC. This ensures that investors are not exposed to undue risks due to a lack of suitable investment options.
Enhanced Transparency and Investor Protection
These changes are designed to enhance transparency, reduce overlap, and provide clearer investment choices for investors. By discontinuing solution-oriented funds, introducing life cycle funds, and imposing limits on portfolio overlap, SEBI aims to create a more robust and investor-friendly mutual fund landscape.
Impact on the Market
The introduction of life cycle funds and the mandatory monthly disclosure of category-wise portfolio overlap are expected to contribute to the stability of the stock market and promote long-term disciplined investing. These measures will also help investors make more informed decisions and avoid over-diversification.
Conclusion
The new rules introduced by SEBI represent a significant step towards enhancing the mutual fund industry's transparency and investor protection. Investors should stay informed about these changes and consider how they might impact their investment strategies.
