Sebi extends portfolio rebalancing timelines to all passive breaches in MFs

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Market regulator Sebi on Thursday said that timelines for portfolio rebalancing in mutual fund schemes will now be applicable to all types of passive breaches across actively managed schemes, which was earlier limited to only asset allocation.

A passive breach refers to unintended deviations from the mandated asset allocation or regulatory limits that do not arise from the direct actions or omissions of asset management companies (AMCs).

Passive breaches generally do not happen due to the omission and commission of Asset Management Companies (AMCs). The mandated rebalancing period for all mutual fund schemes, except Index Funds and Exchange Traded Funds (ETFs), is 30 business days.

Such breaches may be caused by corporate actions, significant price movements in underlying securities, maturity of instruments, or large-scale investor redemptions.

The clarification came in the wake of a recommendation made by the Mutual Funds Advisory Committee (MFAC) and is aimed at ensuring consistency in regulatory compliance and enhancing investor protection.

"In view of...the recommendation of the Mutual Funds Advisory Committee (MFAC), it is clarified that the provisions shall be applicable for all types of passive breaches for the actively managed mutual fund schemes," the Securities and Exchange Board of India (Sebi) said in a circular.

The regulator said that provisions for mutual funds will now apply to all such breaches, mandating timely rebalancing even when the deviations are not deliberate.

The regulator also underlined that while active breaches are considered violations of the Sebi mutual fund regulations, passive breaches often stem from external factors and market dynamics.

Despite their unintentional nature, these breaches could still affect the risk profile of schemes, making it necessary to rebalance portfolios within a stipulated time frame, Sebi said.