With an aim to safeguard mutual fund investors from high-risk assets, regulator Sebi has asked asset management companies to make all their investments in listed or to-be-listed equity securities. The new framework comes after the board of Securities and Exchange Board of India (Sebi) approved a proposal in this regard in August.
Exposure to risky debt securities has emerged as a major risk for capital market investors, including those coming through the mutual fund route, and the regulator has been making efforts to enhance its regulatory safety net against such risks. “All investments by a mutual fund scheme in equity shares and equity related instruments shall only be made, provided such securities are listed or to be listed,” the regulator said in a notification dated September 23.
Besides, Sebi has allowed mutual funds to invest in unlisted non-convertible debentures (NCDs) up to a maximum of 10 per cent of the debt portfolio of the scheme. This would be subject to such investments in unlisted NCDs having simple structures, being rated, secured and with monthly coupons.
“Mutual fund scheme shall not invest in unlisted debt instruments including commercial papers, except government securities and other money market instruments. Provided that mutual fund schemes may invest in unlisted nonconvertible debentures up to a maximum of 10 per cent of the debt portfolio of the scheme…,” the regulator noted. Also mutual funds have been permitted to accept upfront fees with disclosure of all such fees to valuation agencies, and standard methodology for treatment of such fees would be issued by industry body AMFI (Association of Mutual Funds in India) in consultation with Sebi.
“The balance-sheet shall disclose under each type of investment(s) in securities, the aggregate market value or fair value of securities classified as below investment grade and default,” Sebi noted.