8 things that changed in the mutual fund industry in 2020

The year 2020 was a roller-coaster ride for everyone including the mutual fund industry. For various reasons, the industry underwent a lot of changes. The market watchdog- Securities and Exchange Board of India, brought in a slew of new rules and regulations to make mutual funds more transparent and investor-friendly.

Here’s a look at the 8 changes that the market regulator made to the mutual fund industry:

Change in investment mandate of multi cap funds

In September 2020, Sebi issued a circular changing the portfolio mandate of multi cap fund schemes. According to the new rule, multi cap funds will have to invest a minimum of 25 % each in large cap, small cap and mid cap stocks from January, 2021. This will take the overall equity exposure of these schemes up to 75% as opposed to the current minimum equity exposure of 65%, with no market cap limits.

This move aims at making multi cap funds ‘true to label’ and hold a well-diversified portfolio. Most multi cap funds had a large cap bias with almost minimum or no investments in small cap stocks. Many fund houses spoke about converting their existing multi cap schemes to ESG funds or Focused funds to avoid the new mandate.

Introduction of flexicap category

The change in mandate for multi cap schemes did not go down well with many big fund houses. Many top fund managers and CIOs spoke against the move and said that this will make the category risky for investors. The major issue with the change was a mandatory 25% exposure to small cap stocks. On November 06, Sebi intervened and issued a circular for the introduction of a new mutual fund category- Flexi Cap Funds. Flexi cap funds are a new name for the old multi cap funds- a category that is market cap agnostic and has to have a minimum equity investment of 65%.

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Change in NAV calculation

Sebi also tweaked the rules for NAV calculation in mutual funds this year. According to the new rules, investors will get the purchase NAV of the day when investor’s money reaches the asset management company (AMC), irrespective of the size of the investments. This rule comes into effect from January 1st, 2021 and will not be applicable to liquid and overnight funds.

Tightened inter-scheme transfer norms

In wake of the liquidity crisis triggered by the Covid-19 pandemic, many fund houses were trying to maintain liquidity in some short duration debt schemes by transferring bad credit to either balanced funds or to longer duration schemes. Sebi came out with new rules to protect investors’ money from getting impacted by this process.

From 1 Jan, 2021, inter-scheme transfer in close-ended funds can only be done within 3 business days of the allotment of the scheme’s units to investors and not thereafter. Furthermore, Sebi took cognisance of the movement of bad credit from one scheme to another and directed that fund houses shall not be allowed to transfer debt papers to another scheme if there is any negative market news or rumour about a security in the media or if an alert is generated about a security for its risk levels in the preceding 4 months.

Advisor distributor segregation
Sebi also mandated the long-pending segregation of advisors and distributors this year. This was done primarily to address the issue of mis-selling and overpricing of services given to retail investors. According to the new rule, a company with both advisory and distribution arms can either provide financial advice or sell products to its clients. Individual planners and distributors also have to choose one of the jobs and register accordingly with AMFI.

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New risk-o-meter label

To help investors make better decisions about their investments in high risk mutual funds, Sebi introduced a new category on the risk-o-meter. Apart from the existing five categories of risk, ‘Very high’ risk category will also be seen on the risk-o-meter tool. Sebi also directed fund houses to disclose and evaluate risk basis the portfolio of the particular scheme and not the category. From January 1st, 2021, fund houses are required to make monthly risk-o-meter public along with the portfolio disclosure.

Dividend options renamed

Mis-selling in the name of regular dividends is an old practice in mutual funds. Sebi finally took action to bring more transparency to the dividend payouts in mutual fund schemes and directed fund houses to clearly mention that the dividends might be paid from their capital. Hence, from April, 2021, dividend options in the existing as well as new schemes will be renamed to clearer, more transparent nomenclature. The dividend payout option will be renamed as income distribution cum capital withdrawal option. Dividend reinvestment option will be renamed as re-investment of income distribution cum withdrawal option and dividend transfer plan will be renamed as transfer of income distribution cum capital withdrawal plan.

Norms to bring in more transparency in debt securities transaction

Sebi tweaked the disclosure norms for debt mutual funds this year to help investors understand the risk levels in the portfolios early. According to the new norms, fund houses will have to disclose the yields of the underlying instruments of the scheme, along with the portfolio on a fortnightly basis. The portfolio disclosure used to happen on a monthly basis before the new rule. Fund houses used to disclose only the indicative yield of the portfolio and not the specific yields of the securities. Mutual fund advisors say that this move makes debt mutual funds more transparent and credit risk a little more predictable in these schemes.

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