SEBI has introduced some new rules that will change the mutual fund industry in a big way from next year. As these come into effect from this year, let us quickly recap these new rules.
New risk-o-meter
SEBI has modified the product labelling guidelines in mutual funds. From January 1, another level – ‘very high risk’ - will feature in the risk-o-meter that helps investors gauge the level of risk through a meter. With this, 'Risk-o-meter' in mutual funds will have six levels. Earlier there were 5 levels to depict risk. Here are the risk levels according to the new guidelines:
i. Low Risk, ii. Low to Moderate Risk, iii. Moderate Risk, iv. Moderately High Risk, v. High Risk and vi. Very High Risk (the added level).
Another key change is the introduction of a formula to select risk level in Risk-o-meter. SEBI has given weightage to various risks like liquidity risk, credit risk and interest rate risk to calculate risk level of a debt scheme. Similarly, in equity funds, SEBI has assigned certain values to schemes depending on market capitalization, volatility and impact costs. Fund houses will have to revise Risk-o-meter of their scheme on a monthly basis and disclose it on their website and AMFI.
Currently, fund houses assign risk level of schemes at the time of NFO based on characteristics of the scheme. For instance, liquid funds and ultra-short term bond funds having average maturity of less than 90 days typically show ‘low risk’ on Risk-o-meter. But the new rules mean a liquid fund of ABC fund house and another liquid fund of XYZ fund house can have different risk levels in the Risk-o-meter.
Uniformity of NAV
From February 1, 2021, barring liquid and overnight funds, investors will get NAV once the money reaches the fund house irrespective of the investment amount. So far, investors have been getting the same day NAV in all the schemes if they invest up to Rs 2 lakh before the cut off time. This means NAV allocation will largely depend on the efficiency of the financial system.
For liquid and overnight funds, investors will continue to get previous day NAV irrespective of investment amount if they give the purchase request before the cut-off time.
Tightening of inter scheme transfer norms
SEBI has tightened the norms for executing inter scheme transfers from the next year. From January 1, 2021, no inter scheme transfers (ISTs) of a security shall be allowed, if there is negative news or rumors in the mainstream media or an alert is generated about the security based on internal credit risk assessment during the previous four months. Further, if the security is downgraded following ISTs within a period of 4 months, fund managers of buying schemes have to provide detailed justification and rationale to the trustees for buying such security.
With these guidelines, ISTs have become a cumbersome process and it will take a lot more time than what it used to be earlier. Therefore, fund managers will prefer that they explore other avenues as much as possible and use ISTs very sparingly.
