NFO Rules: Know How SEBI's Newly Introduced Changes Are Likely To Impact The Mutual Funds Industry

The Securities Exchange Board of India has made fresh amendments to its Mutual Funds Regulations. The amendment was announced after SEBI’s 208th meeting held on December 19. The changes are aimed at reducing the time taken for fund deployment in New Fund Offers, increasing transparency and curbing mis-selling in the mutual fund industry.

New Rules For Funds Collected By Asset Management Companies For NFOs

The markets regulator approved amendments to SEBI (Mutual Funds) Regulations, 1996 (Regulations). Here’s a look at some of the key changes introduced by the regulator and their impact on the mutual fund industry:

New Timeline For Fund Deployment

The timeline for the deployment of funds raised via New Fund Offers has been reduced to 30 days from 60-days. The markets regulator said that if Asset Management Companies (AMCs) do not deploy the funds within 30 days investors can exit the scheme without paying an exit load.

Sandeep Bagla the Chief Executive Officer of TRUST Mutual Funds told Outlook Money that the reduction in the timeline to 30 days has been made to reduce the gap between the view taken by the investor investing in the NFO and the fund manager’s actions.

“When the investors give you money in any fund it basically implies that the investor wants to take exposure to the asset sub-category. If the fund manager does not invest the money the opportunity will be lost for the investor, and the investor will not be able to gain from the view he or she wanted to take. So, to avoid any significant gaps between investor’s view and fund manager’s actions, the SEBI has proposed that the money should be deployed within 30 days,” Bagla told Outlook Money.

Bagla added that while there might not be any significant impact on the mutual fund industry on the Asset Management Company’s front there could be instances where a fund manager might not be able to wait to time the market for a better price and would have to deploy an investment strategy according to the 30-day timeline for the deployment of funds.

“On the AMC front there’s no impact except that the fund manager would not be able to wait and time the market for a better price and would have to invest quite urgently to match the 30-day deadline,” Bagla said.

Limits On Fund Collection

The SEBI has discouraged AMCs from raising excessive funds via NFOs. AMCs can only raise the amount of funds which can be deployed within 30 days. Bagla told Outlook Money that there may be cases where the money raised by the fund house for an NFO might not be getting absorbed in the market, thus the change has been introduced to safeguard the investor’s interests and increase the absorption of funds.

“If the ideal size of the fund could be Rs 1000 crore fund houses might be raising Rs 5000 crore because of the general exuberance in the market and the efficient machinery of mutual funds, money is not possibly getting absorbed in the market. So, SEBI has introduced the change to safeguard the unitholder,” Bagla told Outlook Money.

Curbs On Aggressive Switching Between Funds

If an investor switches their investment from an existing scheme to an NFO the distributor will earn the lower commission of the two schemes. The move is aimed at addressing mis-selling by lowering the incentive for aggressive sales tactics.

Disclosure of Stress Testing

The SEBI had mandated that mutual fund houses need to mandatorily disclose stress testing results for all mutual fund schemes. The move is aimed at increasing transparency by helping investors in assessing the risks associated with their investment.