Mutual funds are one of India’s most popular and growing investment avenues. And with increasing acceptance of mutual funds among individuals, the regulator needs to ensure that robust rules and regulations protect investors.
The market regulator SEBI has constantly been moulding the rules and regulations to make mutual funds a better investment route. Keeping up the pace, here are four rules and amendments made by SEBI in 2021 to better the mutual fund industry.
- Applicable NAV Rule
In a circular dated September 31, 2020, SEBI announced the new rule for NAV that will apply to purchase transactions in mutual funds. NAV or the Net Asset Value is the price of one unit of a mutual fund. According to this rule, irrespective of the money you invest in a mutual fund scheme, the NAV for the units you buy must be available in the fund’s account before the cut-off times for purchase transactions. This is true for all mutual fund schemes. The rule came into effect on February 1, 2021.
The new rule will not drastically affect long-term investors. It might be a concern for investors looking to redeem a considerable lump sum amount.
- Silver ETFs
Till 2021, Indian investors who wanted to take exposure in commodities through the ETF could only invest in gold ETFs. Silver is another vital commodity. Mutual fund houses were behind regulators to allow silver ETFs in the market. SEBI finally gave a green flag to it.
Silver ETFs will primarily invest in silver or silver-related instruments with silver as an underlying investment. Silver ETFs will track the domestic price of silver and physical silver will be of 99.9 per cent purity.
Silver ETFs will give investors an option to invest in silver. They wouldn’t have to worry much about the purity of silver and the underlying risk. Silver ETFs may help investors to diversify their investment portfolios.
- Unitholders consent for winding up a scheme
In the recent announcement on December 28, 2021, the watchdog, SEBI, mandated that the trustees of mutual fund schemes take the majority consent of unit holders before winding up a scheme. As per the rule, if the trustees decide to wind up a scheme, they need to get the consent of unitholders in a majority. A voting system can decide the majority, with a system of one vote per unit held.
The trustees need to publish results in 45 days of the notice of winding up. If the trustees fail to obtain the majority, the fund should be open for business from the next day of publication of voting results.
The rule has been implemented to safeguard the interest of mutual fund investors further. It came into consideration after Franklin Templeton India mutual fund wound up its 6 schemes because of redemption pressure and lack of liquidity.
- Swing pricing mechanism for a few mutual fund categories
On September 30, 2021, SEBI announced the swing price mechanism for open-ended debt mutual funds. Swing pricing is a mechanism by which the AMCs can adjust the NAVs of the scheme based on inflows or outflows in the fund. The regular NAV will apply for investors who redeem up to Rs.2 lakh. Overnight, gilt, and 10 years maturity funds are not a part of this framework. The framework will come into action on March 1, 2022.
Withdrawals by significant investors can lead a mutual fund scheme to liquidate its most liquid shares. It reduces the impact of significant redemptions on existing investors by lowering unit value dilution. After redemption, the portfolio may contain obsolete or illiquid securities, affecting investors who choose to stay. To avoid such a situation, the mutual fund may choose swing pricing. So, the investors who want to get their money back cannot trade at the NAV and will have to get their money out at, say, 2% below the current NAV.
Therefore, the swing pricing mechanism won’t affect retail investors even if there is significant volatility in the debt fund NAV.
The mutual fund industry in India is constantly evolving. Any change in the regulatory framework is bound to improve the life of investors. Keeping this in mind, we had put together a blog on four recent developments by SEBI for the mutual fund industry in 2021. The financial scenario of India is constantly changing, and we can expect more investor-friendly norms by SEBI in 2022.