The capital markets regulator Securities and Exchange Board of India recently issued a circular defining the rules for rebalancing of portfolios of mutual fund schemes, reported Moneycontrol.
Aside from overnight funds, all schemes will have a mandatory rebalancing period of 30 days, in the event of deviation from mandated asset allocation mentioned in the scheme information document (SID) as a result of passive breaches. These rules will come into force from July 1, 2022, Monecontrol wrote.
Passive breaches imply instances not arising out of the actions of the fund managers. These include the changes arising out of the movement in the prices of the assets held.
For example, a fund may have stipulated to invest a minimum of 65 percent in stocks. This allocation may go lower than 65 percent if the prices of stocks held in the scheme’s portfolio fall.
In such a case, the fund managers must act within 30 days from the date of such deviation and reinstate the allocation to bring it in alignment with what is mentioned in the scheme document.
However, if the fund manager fails to do so, then a reasoning in writing, will be placed before investment committee of asset management committee, which can extend this period up to 60 business days from the date of completion of the mandated rebalancing period.
Prima facie, the directive brings uniformity in the timelines for rebalancing of portfolios and should work in favour of investors.
“Fund managers will be required to stick to the asset allocation mandated in the schemes’ SID. This brings in discipline and investors get to invest in the portfolios as mentioned in the SID. This is in the interest of the investors,” said G Pradeepkumar, CEO, Union Mutual Fund.
SEBI has also made it clear that in case the fund house fails to adhere to these guidelines, then it will not be allowed to launch new schemes nor can it charge any exit load on redemptions.
The fund houses are asked to keep the trustee informed about deviations in the asset allocation of the portfolios. In case such deviation exceeds 10 percent of the assets under management of the main portfolio of the scheme then it is incumbent upon the fund house to inform the investors giving details of the portfolio not rebalanced.
The investors must be updated when the portfolios are rebalanced. So, any deviation in the portfolio’s mandated asset allocation should be communicated by the fund house along with portfolio disclosures.