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The capital market regulator, the Securities and Exchange Board of India (SEBI), vide a circular dated July 8, 2024, has streamlined the prudential norms for passively managed mutual funds, i.e. Index Funds and Exchange Traded Funds (ETFs).
The new circular mandates that no mutual fund scheme shall make any investment in the listed securities of group companies of the sponsor which is in excess of 25% of the net assets of the scheme, except for investments by equity-oriented exchange traded funds (ETFs) and Index Funds and subject to such conditions as may be specified by SEBI.
In the case of equity-oriented ETFs and Index Funds, which use widely tracked and non-bespoke indices, investments can be made in accordance with the weightage of the constituents of the underlying index. However, such investments shall be subject to an overall cap of 35% of the net asset value of the scheme, in the group companies of the sponsor.
According to the circular, the widely tracked and non-bespoke indices shall be indices that are tracked by passive funds or act as primary benchmarks for actively managed funds with collective Assets under Management (AUM) of Rs 20,000 crore and above.
Table 1: List of Widely Tracked and Non-bespoke Indices
Based on AUM as of June 30, 2024
(Source: Annexure A of SEBI Circular)
Moreover, the circular states that passively managed mutual fund schemes based on the underlying indices, other than those mentioned in Annexure A (see Table 1) shall rebalance their portfolio within 30 business days from the date of issuance of the circular (dated July 8, 2024).
In case the portfolio of the scheme(s) is not rebalanced within 30 business days, justification in writing, including details of efforts taken to rebalance the portfolio shall be placed before the Investment Committee of the AMC.
Thereafter, the Investment Committee if so desires, can extend the timeline for rebalancing up to 60 business days from the date of completion of the mandated rebalancing period.
Now if the portfolio of the scheme(s) is not rebalanced with the aforementioned mandated plus the extended timeline, the circular states that the AMC or the mutual fund house shall not be permitted to launch any new scheme till the time the portfolio is rebalanced and not levy exit load, if any, on the exiting investors of such scheme(s).
These norms are issued pursuant to public consultation on the recommendations of the working group and deliberations in the Mutual Funds Advisory Committee (MFAC). They are in the interest of investors in securities and to promote the development of the market.