India’s capital market regulator is looking to address the problem of overlaps in the portfolios of mutual fund (MF) schemes and bring in better clarity. To this effect, the Securities and Exchange Board of India (SEBI) on Friday floated a consultation paper to review current rules governing categorisation and nomenclature of mutual fund schemes.
Value vs Contra Funds, and Overlap Norms
It suggests allowing MFs to offer both value and contra funds subject to the condition that no more than 50% of the schemes’ portfolios shall overlap at any point in time. Currently, they can only launch one of these.
The overlap condition, SEBI notes, shall be monitored at the time when the new fund offer is deployed and subsequently on a semi-annual basis using month-end portfolios. Should there be an overlap beyond the prescribed limit, the asset management company (AMC) would need to rebalance the portfolios within 30 business days, the draft circular said. This deadline may be extended by a month. “If the deviation persists beyond this period, investors of both the schemes shall be given an exit option without any exit load,”the regulator said.
Other Key Proposals
In arbitrage schemes, SEBI suggests allowing exposure to debt instruments only in government securities with a maturity of less than one year and in repos backed by government bonds. In the equity saving scheme category, the net equity exposure and arbitrage exposure between 15% and 40% has been proposed.
For sectoral and thematic schemes, SEBI proposes that fund houses ensure that no more than 50% of the schemes portfolios overlap with other equity schemes except for large cap schemes. It also proposes that sectoral debt funds be created while ensuring that no more than 60% of the portfolio in a sectoral debt scheme overlaps with any other debt category scheme.
SEBI observed that the MF industry has grown significantly and this surge has been accompanied by diversification of asset allocation strategies, and the emergence of new investment avenues such as REITs and InvITs. Accordingly, the residual portion of equity schemes can be invested in a mix of asset classes such as debt, gold, silver, REITs, and InvITs, subject to limits in each class.In the debt category too, the residual portion can be invested into REITs and InvITs except for the schemes with shorter duration. This has also been proposed in the hybrid category, except for dynamic asset allocation and arbitrage funds.
Further, SEBI said that AMCs at their discretion may launch an additional scheme in the existing scheme categories listed above, subject to some conditions.
Various nomenclature changes have been proposed in debt schemes including replacing the term ‘duration’ with ‘term’ for better clarity and the ‘low duration fund’ has been proposed to be renamed as ‘ultra short to short term fund’ to better reflect the investment objective. Across categories it has been proposed to replace ‘fund’ with ‘scheme’. The regulator has sought public comments on a total of 20 proposed changes to its 2017 categorisation circular by August 8.