Listen to this article
Passive breach within the scheme will no longer be tolerated. SEBI has asked fund houses to remain true to label by fixing passive breaches in their schemes within 30 days.
Passive breach happens when allocation to certain asset class or instrument changes due to market movement or fund management strategy. For instance, a large cap fund has to maintain 80% exposure to large cap stocks; however, if due to volatility or internal fund management call, the overall allocation to large cap stocks reduces to 75%, it is a passive breach.
So far, there was no time line to fix passive breaches. As a result, a few fund houses have kept allocation which was not in line with the scheme’s mandate. SEBI’s new norms will ensure that the fund house maintains allocation to remain true to the label.
The rule is applicable on all active schemes except overnight funds.
If a fund house does not adhere to these norms, it will have to give an explanation to the investment committee. The committee may provide a time of 60 more business days to the mutual fund to fix allocation if it finds the explanation satisfactory.
Further, SEBI will bar fund houses from launching new schemes if they do not adhere to the guidelines. SEBI may allow fund houses to relaunch new scheme only after they rebalance portfolio across all schemes.
Also, the market regulator will not allow non-complaint fund houses from charging exit load during the period.
SEBI said that AMCs will have to report cases of deviation to trustees and investors if the breach is over 10%. SEBI said, "In case the AUM of deviated portfolio is more than 10% of the AUM of main portfolio of scheme, AMCs have to immediately disclose the same to the investors through SMS and email / letter including details of portfolio not rebalanced. AMCs shall also have to immediately communicate to investors when the portfolio is rebalanced.”
