SEBI Strengthens Mutual Fund Rules: What You Need to Know
SEBI, India’s market regulator, has updated its rules for mutual funds. Now, all passive breaches in actively managed funds must be fixed within 30 days. This change applies to all types of passive breaches, not just asset allocation issues.
New Rules for Mutual Fund Compliance
Previously, SEBI’s 30-day rule for fixing portfolio breaches only covered asset allocation issues. The new directive expands this timeline to include all passive breaches in actively managed schemes. However, this does not apply to Index Funds and Exchange Traded Funds (ETFs).
This update follows a recommendation from SEBI’s Mutual Funds Advisory Committee (MFAC). The committee suggested a more comprehensive and consistent approach to compliance.
SEBI’s Official Statement
SEBI clarified in a circular:
“Based on the Mutual Funds Advisory Committee’s (MFAC) recommendation, we confirm that the rules will now cover all types of passive breaches for actively managed mutual fund schemes.”
Understanding Passive Breaches in Mutual Funds
Active breaches, which result from direct decisions by Asset Management Companies (AMCs), are already considered violations. SEBI recognizes that passive breaches, though unintentional, can still alter the risk profile of investment schemes. Therefore, timely rebalancing is crucial.
What Exactly Are Passive Breaches?
A passive breach is an unintended deviation from the prescribed asset allocation or regulatory limits. It is not caused by any direct action or inaction by AMCs. These breaches are usually beyond the control of fund managers and can occur due to:
- Corporate actions
- Sudden changes in the prices of underlying securities
- Maturity of instruments
- Large-scale investor redemptions
For all mutual fund schemes, except Index Funds and ETFs, SEBI now requires that portfolios affected by such breaches be rebalanced within 30 business days.
