Here are major announcements from the capital markets regulator’s latest exercise in categorisation and rationalisation of mutual fund schemes. As per the Sebi circular dated 26 February, equity mutual funds may allocate up to 35% of their noncore allocation to gold and silver, as well as Infrastructure Investment Trusts (InvITs) and debt instruments.
According to Kirttan Shah, founder of Truvanta Wealth, this move gives flexibility to funds that hold high percentages of cash. “Instead of holding cash, which is in debt instruments only, they can take a tactical call in having some exposure to gold or silver. Most funds might not do precious metal allocation, but now there is an option available to them,” Shah said.
In another move, the regulator has allowed fund houses to offer both value and contra funds, subject to the condition that the portfolio overlap between the two schemes should not exceed 50%.
Further, to make funds more ‘true-tothe-label’, Sebi has mandated that a sectoral or thematic equity scheme ensure that no more than 50% of its portfolio overlaps with other equity schemes, whether in the sectoral/thematic category or other equity categories, except for large-cap schemes.
Existing sectoral/thematic schemes will have to ensure compliance regarding portfolio overlap limits within three years.
“Now the portfolio needs to be more aligned towards the end product category rather than being a general, well-diversified portfolio,” said Nitin Agrawal, CEOMutual Funds, InCred Money.
By mandating monthly overlap disclosure within equity, debt and hybrid segments, Sebi has ensured greater transparency into overall exposure across various schemes, helping investors avoid over-diversification across schemes with similar underlying exposure.
In another major move, solution-oriented schemes such Retirement Funds and Children’s Funds have been discontinued. Such schemes would be merged with other schemes having similar asset allocation and risk profile. Instead, Sebi has greenlighted Life Cycle Funds, which are essentially target-date funds with glide paths for goal-based investing.
Mutual funds have been allowed to launch life-cycle funds with a minimum tenure of 5 years and a maximum of 30 years. Such funds can have tenures in multiples of 5 years, and at any given point in time, a mutual fund can have at most six funds active for subscription.
The portfolio under these funds can automatically adjust to match the investor’s time horizon, progressively shifting from equity to lower-risk assets as the goal approaches.
In a major rejig in the fixed-income segment, Sebi has allowed the launch of sectoral debt funds. This means that a fund house can launch funds in sectors such as financial services, energy, infrastructure, housing, and real estate after ensuring sufficient availability of investment-grade paper. “Sector debt funds may help deepen the overall debt market by directing flows to growth sectors,” said Agrawal.