Investment limits Sebi prescribes for mutual funds
2 min read.Updated: 26 Feb 2019, 08:15 AM IST
In case of unrated debt instruments, a mutual fund cannot invest more than 10% of the portfolio in a single issuer and 25% in all such securities
In case of listed securities of the sponsor and their group companies, the investment cannot exceed 25% of the scheme’s portfolio
Did you know that there are guard rails that the Securities and Exchange Board of India (Sebi) has put in place to protect you from the risks of over-exposure to a particular security, sector or group when you buy a mutual fund?
While the securities and sectors in which a fund invests in and the extent of exposure is the choice of the fund manager and driven by the investment objective of the scheme, there are broad investment guidelines that need to be followed to ensure a minimum level of diversification in the portfolio to manage the risks to the investor.
Post re-categorisation of schemes, there are clear definitions of what constitutes a large-, mid- and small-cap stock and the portion of the fund’s assets that should be invested in them depending on the type of equity scheme. Similarly, for debt schemes, there are clear definitions of the duration of the securities that will be included in each category. For hybrid funds, the regulations lay down the split between equity and debt.
Clear demarcation of different types of funds not only makes selection of funds easier depending upon the risk the investor is comfortable with, it also enables a more meaningful comparison of performance since you are now comparing schemes with similar portfolios. It eliminates situations of say a large-cap fund taking exposure to mid-cap stocks to give a boost to returns or a liquid or money market fund holding longer duration papers to benefit from a gain in value but also making the fund riskier.
At the next stage, there are caps on the exposure that a scheme can take to a particular security or sector or group. In case of equity funds, a scheme’s portfolio cannot hold more than 10% in a particular stock. In case the shares are unlisted, which are riskier because there is less monitoring from Sebi and the stock exchange, this limit is 5%.
In case of debt schemes, the portfolio cannot hold more than 10% in investment grade (BBB- and above) bonds of an issuer. This can be increased to 12% with the approval of the trustees. The limit does not apply to government bonds. Investment in the bonds of a particular sector, say financial services or power, cannot exceed 25% of the portfolio. Schemes can invest an additional 15% in AA rated bonds of housing finance companies. A scheme’s exposure to debt instruments of different companies belonging to the same group is limited to 20% of the assets and this can go up to 25% with the approval of the trustees. In case of unrated debt instruments, a mutual fund cannot invest more than 10% of the portfolio in a single issuer and 25% in all such securities. A mutual fund cannot take any exposure to privately placed and unlisted securities issued by the sponsor of the mutual fund or their group companies. In case of listed securitiesof the sponsor and their group companies, the investment cannot exceed 25% of the scheme’s portfolio.
Remember, these restrictions are applicable at the time of making the investment and mutual funds are not required to bring down the exposure if it goes beyond the prescribed limits subsequently.
Reproduced, as narrated by Sunita Abraham, in livemint on above listed date, ie 26-2-19.
DISCLAIMER: None of the data or views are my personal in the above article, but thought useful to share.