The Securities and Exchange Board of India (SEBI) has released circulars changing the regulations on and of mutual funds. These changes follow feedback from the industry and consultations with the Mutual Fund Advisory Committee.
The new regulations will improve transparency for stakeholders and other participants in the sector.
The following are changes in disclosure requirements:
- Total recurring expenses, half yearly returns and annualised yields along with all other disclosures must now be made separately for direct and regular plans of the scheme.
- To standardise disclosures, the format will be reviewed and finalised by the Association of Mutual Funds in India, in consultation with the SEBI
- Coloured labels, indicating the nature of risk will be added to mutual fund schemes in all promotional and disclosure materials, comprising:
- Irish green – for low risk
- Chartreuse – for low to moderate risk
- Neon yellow – for moderate risk
- Caramel – for moderately high risk
- Dark orange – for high risk, and
- Red – for very high
- Any change in the risk category must be communicated through a notice in the prescribed format to all unit holders of the scheme.
These disclosure requirement changes will take effect from 5 December 2024.
For overseas investment of mutual funds, changes involve the following:
- Contributions of all investors are pooled into a single investment vehicle;
- Pari-passu and pro-rata: The corpus of the overseas mutual fund/unit trust is a blind pool (e. common portfolio) with no segregated portfolios. All investors receive a share of returns from the fund in proportion to their contribution;
- The independent investment/fund manager makes all investment decisions;
- Overseas mutual funds publicly disclose their portfolios on quarterly intervals to maintain transparency; and
- No advisory agreement can be struck between Indian mutual funds and underlying overseas mutual funds, to prevent conflict of interest and avoid any undue advantage to either party.
Limits are imposed where Indian mutual funds must ensure the underlying overseas mutual fund does not have more than 25% exposure to Indian securities.
If it exceeds 25%, a six-month observance period shall be applicable and no fresh investments can be made. The portfolio will also have to be rebalanced during this period. If the earlier exposure level falls below 25% during this observance period, the scheme may resume investments.
Non-compliance will result in an inability to accept new subscriptions in the current scheme and launch any new scheme.
The changes to regulations on overseas mutual funds took effect on 4 November 2024.
