Regulations

Regulations

Mutual funds are regulated by a number of bodies to ensure investor protection and market stability. The Securities and Exchange Board of India (SEBI) is the primary regulatory body that governs mutual funds in India. SEBI ensures that the mutual fund industry operates in a transparent and fair manner by enforcing rules and regulations, conducting inspections and audits, and penalizing any fraudulent activities. Mutual funds are required to register with SEBI before launching any new schemes, and they must comply with the various disclosure requirements outlined by the regulator.

In addition to SEBI, mutual funds are also subject to regulations from other government bodies such as the Reserve Bank of India (RBI), the Ministry of Finance, and the Income Tax Department. RBI regulates the flow of money into and out of mutual funds, while the Ministry of Finance is responsible for framing policies related to mutual funds. The Income Tax Department regulates taxation related to mutual funds and issues guidelines on how mutual funds can be used for tax-saving purposes.

The regulations under mutual funds cover a wide range of areas such as investment objectives, investment strategies, risk management, disclosures, accounting, and investor protection. Mutual funds are required to disclose their investment objectives, investment strategies, and risk factors in their offer documents. They must also disclose information related to their portfolios, including the securities held, the percentage of assets allocated to each security, and the performance of the portfolio. Investors must also be provided with a prospectus that contains important information about the mutual fund, its investment objectives, and the risks associated with investing in the fund. Overall, regulations under mutual funds aim to ensure transparency, fairness, and investor protection in the mutual fund industry.

Regulations ensure that schemes do not invest beyond a certain percent of their NAVs in a single security. Some of the guidelines regarding these are given below.

• No scheme can invest more than 15% of its NAV in rated debt instruments of a single issuer. This limit may be increased to 20% with prior approval of Trustees. This restriction is not applicable to Government securities.
• No scheme can invest more than 10% of its NAV in unrated paper of a single issuer and total investment by any scheme in unrated papers cannot exceed 25% of NAV
• No fund, under all its schemes can hold more than 10% of company’s paid up capital.
• No scheme can invest more than 10% of its NAV in a single company.
• If a scheme invests in another scheme of the same or different AMC, no fees will be charged. Aggregate inter scheme investment cannot exceed 5% of net asset value of the mutual fund.
• No scheme can invest in unlisted securities of its sponsor or its group entities.
• Schemes can invest in unlisted securities issued by entities other than the sponsor or sponsor’s group. Open ended schemes can invest maximum of 5% of net assets in such securities whereas close ended schemes can invest upto 10% of net assets in such securities.
• Schemes cannot invest in listed entities belonging to the sponsor group beyond 25% of its net assets.