Mutual Funds Rules That Comes Effective From Year 2021

SEBI has introduced some regulatory changes applicable to the mutual fund houses, starting from the year 2021. These changes have been done to promote further transparency and fairness in the system and make it more trustworthy for the investors.Let’s look at these new mutual fund rules:

• SEBI has added a 6thcategory of “very high” risk in the Riskometer tool so that the investors are well-informed and can make better decisions. This rule will be effective from Jan 1st,2021.
• The Riskometer will undergo a monthly evaluation. The fund houses will have to disclose the portfolio and the Riskometer for all the schemes on their website 10 days before month-end.
• The same disclosure will have to be made on AMFI’s website as well.
• Most importantly, the risk level will be awarded to the fund, not based on its category, rather on its underlying assets. It evaluates a fund's market capitalisation, liquidity, and volatility to give a score. The overall score is then used to put a fund into one of the 6 buckets of risk-level (with 'very high' risk level being the new entrant).

• Previous Norm All mutual funds were categorised as Low Risk, Moderately Low Risk, Moderate Risk, Moderately High Risk or High Risk. Moreover, the risk was based only on the scheme's category without considering its actual portfolio.
• New Rule Following changes have been made;

• Previous Norm The minimum equity allocation should be 65%. No other allocation restriction, and the fund managers can take their calls while investing across the market cap.
• New Rule As per the current mutual fund rule , every Multicap fund scheme is bound to invest at least 75% in equity stocks. Also, investment of at least 25% in each small, mid, and large-cap stock has been made compulsory. This is to ensure there is a more equal distribution of assets across different asset classes.

• Previous Norm Mutual fund schemes offer different dividend options under these names dividend payout, dividend reinvestment, and dividend transfer plan.
• New Rule The new rule, applicable from Apr 1st2021, requires the dividend option schemes to be renamed as "Income Distribution cum Capital Withdrawal".

• Previous Norm Mutual fund investments of value less than 2 lakhs only will get to purchase on the same day NAV. Also, they must comply with the NAV cut-off timings to get the same-day NAV.
• New Rule Starting from Jan 1st, 2021, investors will be able to purchase on same-day NAV, only if the investment money reaches AMC the same day, irrespective of the investment amount.

• Previous Norm Inter scheme transfers, i.e transferring debt papers to another mutual fund scheme, can be done at current market prices and must adhere to that scheme's investment objective.
• New Rule Starting from Jan 1st,2021, the inter-scheme transfers for closed-ended funds are allowed only up to 3 business days after the scheme units are allotted to the investor. No transfers are possible after this duration for close-ended schemes. Also, the inter-scheme transfer by debt mutual funds can be done only after other options of raising funds have been explored and exhausted by the AMC.

1. Changes in Riskometer Tool This has been one of the most significant changes brought in by SEBI.
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3. Portfolio Allocation in Multicap Equity Mutual Funds
4. Naming Rules for Dividend Option
5. NAV Calculation
6. Inter-scheme Transfers

SEBI often changes mutual fund regulations to keep up with changing requirements and encourage more people to invest in mutual funds. Since SEBI is the regulatory authority, the mutual fund houses are bound to comply with it.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.