Mutual Fund Regulations: SEBI Expands Categories and Investment Framework

Securities and Exchange Board of India (SEBI) broadened the categories of mutual funds in line with the proposals in a consultation paper released last year.

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Key Reforms in Mutual Fund Regulations

• Launch and Investment Norms for Sectoral Debt Mutual Funds: Asset management companies can now introduce mutual fund schemes investing in debt instruments of companies in specific sectors.
  • A sectoral fund would have a minimum investment of 80% in debt and debt related instruments of a particular sector across duration. 
  • The investment would be listed only in corporate bonds with a credit rating of more than AA+. 
• Permitted Sectors for Sectoral Debt Funds: Sectoral Debt Funds may be launched in Financial Services, Energy, Infrastructure, Housing, Real Estate. 
• Investment in InvITs for Long Duration Funds: As per SEBI, the residual investment in long duration funds can be invested in InvITS. 
• Broader Residual Investment Scope for Equity Schemes: SEBI now allowed mutual funds to invest the residual portion of an equity scheme in equity, money market instruments and other liquid instruments, gold and silver instruments as permitted by SEBI and in InvITs.
• Cap on Sectoral and Thematic Fund Exposure: In equity schemes, the overall between sectoral and thematic funds were fixed at 50% except for large caps. 
• Compliance Timeline for AMCs: The market regulator gave three years for AMCs to comply with the overlap condition for the new fund.
• Rationalisation of Existing Categories
  • New category: Life Cycle Fund introduced.
    • Retirement and Children’s Funds discontinued.
  • Minimum duration: 5 years.
  • Maximum duration: 30 years.

Mutual Funds

• About: A mutual fund is a pool of money managed by a professional Fund Manager.
• Trust: It acts like a trust collecting money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments, and/or other securities.
• Income distribution: The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s Net Asset Value
• Systematic Investment Plan (SIP): It is an investment plan where one can invest a fixed amount in a mutual fund scheme periodically, at fixed intervals, instead of making a lump-sum investment being offered by Mutual Funds.
• • The SIP  is similar to a recurring deposit where you deposit a small /fixed amount every month.

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