Sebi extends investor-protection rule to passive mutual fund breaches

Timelines for portfolio rebalancing in schemes will now be applicable to all types of passive breaches across actively managed schemes

India’s market regulator has extended its rule on mutual fund portfolio rebalancing to cover all “passive breaches” in actively managed schemes, not just those related to asset allocation.

 

The Securities and Exchange Board of India (Sebi) issued the directive in a circular dated June 26 to mutual funds, asset management companies (AMCs), trustee companies, and the Association of Mutual Funds in India.

 

What are passive breaches?

 

A passive breach occurs when a mutual fund portfolio unintentionally violates investment limits or asset allocations due to external factors, not due to any fault or action by the fund manager or AMC.

 

According to Sebi’s circular, such breaches can arise from:

 

-Corporate actions (like mergers or stock splits)

 

-Significant price fluctuations in securities

 

-Maturity of debt instruments

 

-Large investor redemptions

 

These can push a fund's composition outside the regulatory or scheme-defined limits without any wrongdoing by the AMC.

 

What has changed?

 

Earlier, Sebi’s rules under Paragraph 2.9 of its Master Circular applied rebalancing timelines only to passive breaches of asset allocation. Now, based on the recommendation of the Mutual Funds Advisory Committee (MFAC), the regulator has clarified that this 30-business-day rebalancing rule applies to all types of passive breaches in actively managed mutual fund schemes.

 

The new rule ensures consistent treatment of all passive breaches, be it in issuer limits, sector exposure, or group limits.

 

This move is aimed at safeguarding investor interests and maintaining regulatory discipline.

 

Why it matters for investors

 

Even though passive breaches are unintentional, they can still change the risk profile of a mutual fund. By enforcing a rebalancing window of 30 business days for all such deviations, Sebi seeks to ensure fund portfolios remain aligned with what was originally promised in the Scheme Information Document (SID).

 

Sebi said the circular has been issued under its powers to “protect the interests of investors” and to promote and regulate the securities market.

 

According to a PTI report, this clarification underscores the importance of uniformity and discipline in fund management practices and reinforces the accountability of AMCs to stay within prescribed investment boundaries.