SEBI overhauls MF rules to enhance investor protection
Thecategorisation step by Securities Exchange Board of India (SEBI) in 2018 brought better clarity for the investors as all the Mutual Funds (MF) were to be part of the stipulated category and only one scheme was allowed in each category for each fund house. It introduced uniformity across the asset classes making fund houses to merge or close similar schemes resulting in a more streamlined and transparent, albeit initially disruptive investment landscape. Now, the regulatory body has come up with yet another overhaul of MF industry.
While continuing its earlier reshaping of categories, further measures were taken on structure, transparency, expenses and valuation norms. Aimed at clarity, comparability and investor protection, made key structural shifts in the norms. It discontinued solution-oriented category like Children’s funds and Retirement funds. Existing schemes will stop subscriptions and be merged with similar schemes of the fund house.
New categories are introduced including life cycle funds. These are goal-based funds with defined maturity like those of target maturity funds in the west. With periods of 5 yr ranging up to 30 years and glide path investment strategy. This could potentially resolve the static asset allocation problem experienced in the traditional retirement products. The portfolio allocation gradually moves from higher equity in the initial years to reduced equity as the maturity date approaches. By aligning risk with different life stages, it could help reduce asset allocation based on whims or psychological decision making.
The other are contra funds and sectoral debt fund. MFs are now permitted to offer both Value and Contra funds subject to the condition that the scheme portfolio overlap between the two schemes shall not be more than 50 per cent. Further any scheme offering in the thematic/sectoral equity category, the fund offerings should ensure no more than 50 per cent overlap in portfolio with other thematic/sectoral funds other than large cap funds. The existing sectoral/thematic schemes shall ensure compliance regarding portfolio overlap limits within three years from the date of this circular. The fund houses are to realign 35 per cent of the excess in the first year, an additional 35 per cent in year two and the remaining 30 per cent by year three. This is a good move as many AMCs have launched a slew of these thematic funds to gather assets with limited diversification.
The overlap condition shall be computed on a quarterly basis using the daily portfolio overlap values i.e. the average of daily portfolio overlap values over a quarter, according to the methodology given for calculating the overlap.Any schemes unable to meet the portfolio overlap criteria after three years shall be mandatorily merged with other schemes as per applicable provisions.
MFs shall launch sectoral/thematic funds as per the list of sectors/themes as published and updated by AMFI in consultation with SEBI on half yearly basis.
Most importantly, fund names must reflect the official category and not emphasise returns making, making mandatory uniform scheme nomenclature for the benefit of the investor comprehension. SEBI has also mentioned that Asset Management Companies (AMC) could launch sectoral debt funds in Financial Services, Energy, Infra, Real Estate, etc. It also said that the residual investment in long duration funds can be invested in InvITs (Infrastructure Investment Trusts). However, the stocks that are not more than 50 per cent of the stocks in a sectoral debt fund can overlap with any other equity fund of the AMC.
Also, the SEBI has allowed MFs to invest the residual portion of an equity scheme in equity, money market instruments and other liquid instruments, permitted gold and silver instruments and in InvITs. SEBI has updated the valuation rules for gold and silver holdings. From 1st April 2026, gold and silver held by the MFs will be valued using polled spot prices from recognised Indian Stock Exchanges replacing the existing London Bullion Market Association (LBMA) benchmark. This brings the valuations closer to Indian market conditions and increases pricing transparency.
Another change is in the arbitrage funds, where the SEBI has restricted the allocation of debt part of the portfolio predominantly into G-Secs (Govt securities) and that too with less than one year maturity. This could turn adverse to the return profile of this category, which is a double whammy, with the increased STT on these funds in the budget. Thus making the income plus arbitrage category turning attractive which is devoid of these restrictions.
Part of the reforms on fee, expense and brokerage structure, SBEI replaced the traditional expense limit through Base Expense Ration (BER). It has cut the this across the schemes of inded/ETF, liquid and close-ended schemes, making them less expensive for the investors. However, statutory levies like STT/CTT, GST, stamp duty, SEBI and exchange fees, etc. are charged on actuals over and above the BER. Additional 5 bps (basis points) expense allowance linked to exit loads are removed. The overall thrust is to reduce hidden costs and make it clearer for the investor. Enhancing higher transparency, the fund houses are mandated to disclose portfolio overlaps between schemes every month on their websites.
In summary, the fund houses have to re-name/-classify schemes within six months, merge funds that doesn’t meet overlap conditions and adjust the portfolios and product offerings to the stipulated categorisation. It’s better clarity and reduced ambiguity for the investors on fund categorisation. Investors gain better with transparent cost structures, easier comparison and realistic gold/silver valuations.
(The author is a partner with “Wealocity Analytics”, a SEBI registered ‘Research Analyst’ firm and could be reached at info@wealocityanalytics.com)