Mutual funds (MF) have become one of the most popular option investors these days. In fact, a lot of investors know how to invest in mutual funds, but are not very sure about the fundamentals of the process. In a bid to make MFs safer and more investor-friendly, the Securities Exchange Board of India (Sebi) has introduced some measures. While some of the new rules became effective from 1 January 2021 others become applicable during 2021.
1) New ‘risk-o-meter’ tool in Mutual Funds
Market regulator Sebi introduced a fresh category of ‘very high’ risk on its ‘risk-o-meter’ tool for investors to make better decisions with high-risk mutual funds. The existing risk-o-meter did not expose the risks involved in a mutual fund completely as it assigned the level of risk based on the category of the fund rather than the actual portfolio. The new ‘risk-o-meter’ is effective from 1 January 2021.
-The new risk-o-meter has six categories of risk: i) Low Risk ii) Low to Moderate Risk iii) Moderate Risk iv)Moderately High-Risk v) High Risk vi)Very High Risk
-Asset management companies are required to make monthly evaluations of the risk-o-meter of every mutual fund scheme and disclose it along with the portfolio disclosure on their website and on the AMFI website within 10 days from the close of each month.
-Changes in the risk-o-meter will have to be communicated to all unitholders of the scheme via e-mail or SMS.
-AMCs also have to publish a history of risk-o-meter changes at the end of every year.
-Debt funds will be evaluated based on the interest rate, credit and liquidity.
-Equity funds will be evaluated on: market cap, volatility and impact cost.
2) Asset allocation of multi-cap mutual funds
Market regulator Sebi has tweaked the portfolio allocation rules for multi-cap equity mutual fund schemes recently. According to the new rules, multi-cap mutual funds will have to invest at least 75% in equities. Further, the fund will have to invest a minimum of 25 per cent of their portfolio each in large-cap, mid-cap and small-cap companies. “All the existing multi-cap funds shall ensure compliance with the above provisions within one month from the date of publishing the next list of stocks by AMFI, i.e. January 2021,” read the Sebi circular dated 11 September. Currently, there is no such allocation restriction and fund managers can invest across the market cap as per their own choice.
3) Dividend Option in mutual funds to be renamed
Dividend refers to the distribution of some of the company’s earnings to its shareholders. It can be issued in various forms, such as cash payment, stocks or any other form. With effect from 1 April 2021, all dividend options of mutual fund schemes will be renamed as income distribution cum capital withdrawal option.
4) Change in NAV calculation
Mutual fund investors will get the purchase net asset value (NAV) of the day when their money reaches the asset management company (AMC), irrespective of the size of the investments. “It has been decided that in respect of the purchase of units of mutual fund schemes (except liquid and overnight schemes), closing NAV of the day shall be applicable on which the funds are available for utilization irrespective of the size and time of receipt of such application,” said the Sebi circular. This rule is applicable from 1 January.
5) Inter-scheme transfers
Inter-scheme transfer (IST) of debt papers in close-ended funds can be done within 3 business days of the allotment of the scheme’s units to investors. After three business days, such transfer will not be allowed. This is applicable from 1 January 2021. Inter scheme transfers involve shifting of debt papers from one mutual fund scheme to another.