5 Recent Changes Made In Mutual Fund Rules

1. Allocation in multi-cap funds

SEBI announced new portfolio allocation rules for multi-cap equity mutual funds that have made it mandatory for these funds to have at least 75 percent of its asset allocation in equity and equity-related investments compared to the current 65 percent requirement.

Further, the fund will have to invest a minimum of 25 percent of their portfolio each in large-cap, mid-cap and small-cap companies.

"All the existing multi cap funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e. January 2021," said the SEBI circular on 11 September.

2. Risk-o-meter tool

SEBI improved upon the risk-o-meter tool and introduced a new category of "very high" risk.

• The existing risk-o-meter did not expose the risks involved in a mutual fund completely as it assigned the level of risk based on the category of the fund rather than the actual portfolio.
• The new risk-o-meter has six categories of risk: i) Low Risk ii) Low to Moderate Risk iii) Moderate Risk iv)Moderately High-Risk v) High Risk vi)Very High Risk
• Asset management companies are required to make monthly evaluations of the risk-o-meter of every mutual fund scheme and disclose it along with the portfolio disclosure on their website and on the AMFI website within 10 days from the close of each month.
• Changes in the risk-o-meter will have to be communicated to all unitholders of the scheme via e-mail or SMS.
• AMCs also have to publish a history of risk-o-meter changes at the end of every year.
• Debt funds will be evaluated based on: interest rate, credit and liquidity.
• Equity funds will be evaluated on: market cap, volatility and impact cost.
• The new risk-o-meter comes into force from 1 January 2021, but can be adopted earlier if ready.
• Read the complete circular here.

3. Dividend Option in mutual funds to be renamed

A dividend is the distributed profit per share. In mutual funds, investors are given two options: growth and dividend.

In the growth option profits made by the scheme are reinvested into the scheme, while in the growth option the profit is distributed to unitholders on a quarterly, half-yearly or annual basis as "dividends."

These dividends, like company dividends, are not regular and only distributed when there is a profit.

To avoid confusion, this option will be renamed as "income distribution cum capital withdrawal" option.

This circular will be effective from 1 April 2021.

4. Inter-scheme transfers

In case of Close Ended Schemes, Inter Scheme Transfers would be allowed within three business days of allotment pursuant to New Fund Offer (NFO) only.

Restrictions have also been imposed on Open-Ended Schemes, to prevent misuse of Inter Scheme Transfer by AMCs to generate liquidity.

SEBI said in a circular that the transfer of assets between different open-ended mutual fund schemes can only be used when other means of raising liquidity has been exhausted. These 'means' include the use of cash and cash equivalent assets, market borrowing and selling of scheme securities in the market.

Even then, "outward IST of the optimal mix of low duration paper with highest quality shall be effected," the circular said.

No ISTs of a security shall be allowed, if there is negative news or rumours in the mainstream media or an alert is generated about the security, based on internal credit risk assessment during the previous four months.

If security gets downgraded following ISTs, within a period of four months, Fund Manager of buying scheme has to provide detailed justification /rationale to the trustees for buying such security, SEBI said.

The circular on IST will be effective from 1 January 2021.

5. Change in NAV calculation

SEBI said that mutual fund schemes shall allot NAV on units on the basis of when the amount is realised irrespective of the size or time of the investments.

The provision does not apply to liquid and overnight funds as the realisation of funds on the same day is already required for purchases in such schemes.

At present, mutual fund investors with cheque values of less than Rs 2 lakh per application get the NAV of the product on the same day of purchase, when made before the cut-off time. For investments over Rs 2 lakh, NAV applicable will be of the day the fund house has realised the cheque. This could be up to three days after the cheque is submitted.

As per the circular, the money should also reach the mutual fund house on the same day for that day's NAV to be applicable.

The change will create a level playing field for investors across mutual fund schemes and is also likely to increase the use of digital payments.

This change will be applicable from 1 January 2021.