Sebi limits passive mutual funds schemes investing in sponsor group companies

Passive mutual funds schemes face investment limits in sponsor group companies, with asset management companies having to rebalance portfolios if not compliant.

Passive mutual funds will now have investment limits on the shares of the sponsor group companies, according to new rules notified on Monday by the Securities and Exchange Board of India (Sebi).

SEBI Bhavan at BKC Bandra in Mumbai (PTI)

What are the details of the new investment rules by Sebi for mutual funds?

Equity-oriented exchange-traded funds (ETFs) and index fund investments in the sponsor group companies are capped at 35% of the scheme's net asset value.

Mutual fund schemes excluding ETFs and index fund investments cannot invest more than 25% of their assets in sponsor group companies.

Sebi has defined "widely tracked and non-bespoke indices" with a collective assets under management of ₹20,000 crore and above, tracked by passive funds or serving as primary benchmarks for active funds.

The Association of Mutual Funds in India (AMFI) will update and publish the list of such indices biannually, on April 15 and October 15, based on AUM data as of March 31 and September 30, respectively, PTI wrote.

This list includes prominent indices such as the Nifty 50 and the BSE Sensex, among others.

What happens if a mutual fund scheme is not compliant with the new Sebi rule?

Passive schemes which are not compliant with the rules must rebalance the portfolio within 30 business days from the date of issuance of the circular, Sebi wrote, adding that “The investment committee, if so desires, can extend the timeline for rebalancing up to 60 business days from the date of completion of mandated rebalancing period.”

Sebi says that asset management companies will not be allowed to launch any new scheme till the time the portfolio is rebalanced, and not levy exit load on existing investors of such schemes, if the portfolio has to be rebalanced to comply with the new regulations.