Sebi tweaks mutual fund norms

Wants stress tests for liquid and money market funds, changes product labelling rules

The Securities and Exchange Board of India (Sebi) on Thursday changed the regulations on risk management for certain debt mutual funds. It also changed the way MF products are to be labelled, through a separate circular on its website.

The regulator said MFs are now required to conduct a stress test of liquid funds and money market MF schemes at least once a month. The risk assessed should take parameters into account such as interest rate risk, credit risk, liquidity and redemption risks. “Further, in the event of a stress test revealing any vulnerability or early warning signal, it would be required to bring it to the notice of the trustees and take corrective action, as deemed necessary, to reinforce their robustness. Each asset management company (AMC) should also be required to have documented guidelines, to deal with the adverse situation effectively,” it said.

MFs had faced issues in such cases during the financial crises in 2008 and 2013, when the Reserve Bank of India unexpectedly tightened liquidity.

Every AMC is required to have such a stress test policy in place, added the circular.

The regulator also said it had consulted its MF advisory committee on product labelling. Currently, one of three colours are used, in advertising or in information given out, to denote the risk involved in investing in a given scheme. The levels of risk have been expanded to five, to be communicated through a speedometer-like dial, with five divisions for each level of risk.

"The depiction of risk using colour codes would be replaced by pictorial meter named "Riskometer" and this meter would appropriately depict the level of risk in any specific scheme," said the circular on the matter.

The product labeling circular is effective from July 1, 2015. It will apply to all existing and new schemes. The circular on stress testing of debt funds is applicable with immediate effect.

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