New Framework On Mutual Fund

By Moderator July 1, 2019 11:39

New framework

SEBI introduced more stringent regulations to govern the management of the mutual fund.

Need for Regulation

  • The mutual fund industry came under its scrutiny after some mutual funds in the last few months had to postpone redemption of their fixed maturity plans (FMPs).
    • HDFC Mutual Fund and Kotak Mutual Fund came to grief and had to roll over or proportionately reduce redemption of their FMPs in April after some Essel group companies failed to redeem their non-convertible debentures where the funds had invested
  • Some mutual funds entered into standstill agreements with companies in whose debt instruments the funds had invested. This is not a welcome practice and goes against the interests of investors in the mutual fund.

New Regulation

  • According to the new SEBI regulations, liquid mutual fund schemes will have to invest at least 20% of their funds in liquid assets like government securities.
  • They will be barred from investing more than 20% of their total assets in any one sector;
    • The current cap is 25%.
  • When it comes to sectors like housing finance, the limit is down to 10%


  • The mandated investment in government securities will ensure a modicum of liquidity
  • The reduction in sectoral concentration will discipline funds and force them to diversify their risks.
  • Now assets of mutual funds are valued on a mark-to-market basis in order to better reflect the value of their investments.


  • One of the new regulations introduced by SEBI is to increase the exit load on short-term investments in liquid mutual funds to discourage sudden demands for redemption.
    • This could possibly hinder fund flow into the bond market, which in India is already quite undeveloped when compared to the rest of the world.


Investor confidence can be shaken by defaults and that will have consequences for the economy. Viewed from this perspective, the regulator’s latest rules should be welcomed.

Fixed Maturity Plans

  • Fixed Maturity Plans are offered by mutual funds (MFs). It is a type of debt mutual fund.
  • Debt mutual funds, unlike equity MFs, invest in debt securities issued by companies (both publicly listed and privately held) and governments.
  • The maturity period of FMP is fixed and investment is essentially locked-in till maturity.

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By Moderator July 1, 2019 11:39