The Securities and Exchange Board of India (SEBI) is exploring changes to regulations governing index funds and exchange-traded funds (ETFs) which might streamline investment rules and enhance the efficiency of these financial products.
Consultation paper to propose the elimination of a 25% limit
SEBI, on February 23 released a consultation paper to propose the elimination of a 25% limit on investments in group companies/sponsors for certain types of funds. These proposals mainly target equity-oriented mutual funds and ETFs.
The rationale & intention of this proposal is to allow these funds to replicate the benchmark index more accurately by aligning their investments with the constituent weightage of the underlying index.
Current investment restrictions for active and passive mutual fund schemes
SEBI formed a working group that has underscored the disparity between the current investment restrictions for active and passive mutual fund schemes. The present situation is that these schemes are capped at 25% of Net Asset Value (NAV) for the investments in group companies of sponsors, sectoral/thematic passive equity schemes can have exposure of up to 35% weight in the index for a single stock/issuer.
SEBI is of the firm view that relaxing this limit would help to prevent unintended tracking errors, thereby improving the accuracy of fund performance in replacing their benchmarks.
Moreover, The SEBI has suggested easing the requirement of having a separate and dedicated fund manager for schemes dealing with commodities like gold, silver and foreign investment.
What will be the Impact
The Market Regulator believes that leveraging existing research capabilities could lead to cost savings for fund houses by eliminating the need for dedicated fund managers.
Another proposal by the SEBI is to make nominations optional for jointly held mutual funds folios. SEBI argues that since the second holder takes legal precedence over a nominee as legal heir, mandatory nominations for the jointly-held folios may not be necessary.
