The central recommendation is a period of 30 days for deploying these funds in accordance with the asset allocation specified in the scheme.
Sebi’s push for this timely deployment of NFO funds is aimed at protecting investors from prolonged delays in market exposure and ensuring that their money is actively invested as intended.
The current regulatory framework, as per Sebi’s Mutual Fund Regulations, 1996 and the Master Circular, 2024, contains a number of provisions for deployment of NFOs. Yet, there is no specific timeline within which AMCs must invest these funds according to the target asset allocation.
Sebi’s recent investigation revealed instances where AMCs delayed deployment and held on to investor funds without actively investing. The reasons ranged from excessive market volatility to high valuations in specific sectors. However, Sebi says that this uncertainty should not leave investors’ money idle for longer than necessary.
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Coordinating fund introductions
As per Sebi’s findings, most AMCs deploy funds within 30 to 60 days, with only a few cases of delay beyond that. Sebi analyzed 647 schemes, of which 633 deployed funds in less than 60 days, while 603 schemes did so in less than 30 days. Sebi’s proposal aims to reduce even the few delays that do occur.
Sebi has proposed that AMCs deploy funds within 30 working days from the date of allotment of the units. In cases where AMCs are unable to do this, they must notify their investment committee in writing, which may grant an extension of a further 30 days, but only for valid reasons, such as unusual market conditions.
Responding to some fund managers’ concerns about the complex market dynamics justifying delayed implementations, Amol Joshi, a registered mutual fund distributor, argued that “if valuations are unfavorable, they should wait to launch the system rather than rush into to make”. fund launches under favorable conditions.
Joshi illustrated how the proposed wagering requirement could impact investment strategies. “Imagine a multi-cap NFO today. Previously, the fund manager could use certain timing elements when deploying new funds. However, with the 30-day timeline, the fund manager will be less able to time the market and retain cash,” he explains.
Ensure accountability
Traditionally, fund managers have had a wide investment window, giving them the flexibility to wait for ideal market conditions. However, Sebi’s new proposal seeks to narrow that window and requires AMCs to adhere to a stricter implementation timeline.
This regulatory push recognizes the AMCs’ ability to deploy funds quickly, which Sebi believes can benefit investors by ensuring their investments are immediately exposed to the market’s growth potential.
“This approach provides clarity for investors and ensures they know exactly when they will get full exposure to the market or theme they have committed to,” said Radhika Gupta, managing director and CEO of Edelweiss Mutual Fund, adding that it company gives priority to immediate use of NFO proceeds.
Sebi’s proposed changes include a clear accountability framework.
For example, if AMCs fail to deploy funds within the specified timeline or upon any granted extension, they could face penalties such as restrictions on launching new schemes and a ban on charging exit fees to investors who elect to leave the fund after 60 business days of non-termination. compliance. This push for accountability highlights Sebi’s focus on investors’ interests by creating a stricter supervisory process.
What this means for investors
The proposed penalties for AMCs that fail to meet implementation deadlines protect investors from bearing the costs of deferred investments. For example, investors receive a tax-free exit if an investment fund does not deploy the money within 60 days.
The proposal also suggests that AMCs consider market conditions before raising significant amounts of money during an NFO. This means that AMCs can, if necessary, delay fundraising in a market with high valuations, protecting investors from entering at a potentially unfavorable time.
“This new requirement is similar to how index funds deploy money on day one to mimic the index,” said Joshi, the mutual fund distributor cited earlier. He clarified that this comparison does not imply similarity in performance, but rather in the approach to financing. deployment, where active fund managers will have fewer options to wait for ideal market conditions.
Sebi’s proposed regulations are aimed at ensuring that investments in NFOs for mutual funds are deployed quickly, transparently and with greater responsibility. Once these proposals are implemented, investors can be assured that their investments are fully deployed in accordance with the intended purpose of the plan and in a timely manner.
It would also reduce the risk of a fund undermining its returns by having money in the market rather than deploying it, especially during a market run-up.
