The Securities and Exchange Board of India, the capital market regulator, has issued a circular that clearly defines the rules governing the rebalancing of portfolios of the schemes launched by mutual funds.
Barring overnight funds, all schemes will have a mandated rebalancing period of 30 days, in the event of deviation from mandated asset allocation mentioned in the scheme information document (SID) due to passive breaches. Passive breaches mean instances not arising out of the actions of the fund managers. These include those changes arising out of the movement in the prices of the assets held.
For example, an aggressive hybrid fund may have stipulated to invest a minimum 65 percent of the money in stocks. This allocation may go below 65 percent if the prices of stocks held in the scheme’s portfolio fall.
In such a case the fund managers have to act within 30 days from the date of such deviation and reinstate the allocation in line with what is mentioned in SID. If the fund manager fails to do so, then justification in writing, including details of efforts taken to rebalance the portfolio shall be placed before investment committee. The investment committee of the asset management company can extend this period for rebalancing up to 60 business days from the date of completion of the mandated rebalancing period.
The directive brings uniformity in the timelines for rebalancing of portfolios and should act 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,” says G Pradeepkumar, CEO, Union Mutual Fund.
Nirav Karkera, Head of Research, Fisdom points out, “While most fund managers have been diligent and proactive in terms of aligning products with stated asset allocation mandates, the timelines have been fairly disparate across AMCs. This creates challenges for advisers and investors, typically witnessed when available products deviate from the stated framework.”
Getting stuck with deviated allocations, consequent misalignment with broader investment strategy, unintended exposure to risks and non-comparability of performance between products belonging to the same category are problems typically associated with products not quite true-to-label, he adds.
The circular has attempted to iron out all these issues faced by investors. The regulator has also made it clear that if the AMC fails to rebalance the portfolio of a scheme, then the AMC 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 the fund house must inform the investors immediately specifying the details of the portfolio not rebalanced. The investors need to be also updated when the portfolios are rebalanced. Any deviation in the portfolio’s mandated asset allocation should be communicated by the fund house along with portfolio disclosures.
These norms apply to the main portfolios of the schemes and do not apply to segregated portfolios. They come into effect from July 1, 2022.