Sebi’s proposal to quickly implement the new fund offer may help investors

The central recommendation is a 30-day period for using these funds in accordance with the asset allocation specified in the program.

Sebi’s emphasis on timely utilization of NFO funds is aimed at protecting investors from prolonged delays in market exposure and ensuring that funds are actively invested as intended.

The current regulatory framework, as per the Sebi Mutual Funds Regulations, 1996 and Master Circular, 2024, lays down several provisions for the placement of NGOs. However, there is no specific timeline in which AMCs must invest these funds depending on their intended asset allocation.

A recent Sebi review identified cases where AMCs delayed implementation by retaining investors’ funds without actively investing. The reasons varied: from excessive market volatility to high valuations in specific sectors. Sebi, however, argues that this uncertainty should not leave investors’ money idle for longer than necessary.

Unification of the mobilization of funds

According to Sebi findings, most AMCs implement the measures within 30-60 days and only in a few cases the delays are longer. Sebi analyzed 647 schemes, of which 633 released funds in less than 60 days and 603 in less than 30 days. Sebi’s proposal aims to reduce even the few delays, if detected.

Sebi has proposed that AMCs should allocate funds within 30 working days from the date of allotment of units. In cases where AMCs are unable to do so, they must report this in writing to their investment committee, which may agree to extend the deadline by a further 30 days, but only for valid reasons, such as unusual market circumstances.

Responding to concerns among some fund managers about complex market dynamics justifying delays in implementation, Amol Joshi, a registered mutual fund distributor, argued that “if valuations are unfavorable, they should wait to launch the program rather than implement it in a hurry,” emphasizing the importance of aligning triggers fund on favorable terms.

Joshi showed how the proposed implementation requirement could impact investment strategies. “Let us imagine a multi-cap NFO today. Previously, a fund manager could apply certain timing elements when launching new funds. However, with a 30-day time horizon, the fund manager will have less ability to time the market and retain cash,” he explained.

Ensuring accountability

Traditionally, fund managers had a wide window to invest, which gave them the flexibility to wait for ideal market conditions. Sebi’s new proposal, however, aims to narrow this window by requiring AMCs to follow stricter implementation schedules.

This regulatory push validates AMCs’ ability to deploy funds quickly, which Sebi believes can benefit investors by ensuring their investments are quickly exposed to the market’s growth potential.

“This approach provides transparency to investors, ensuring they know exactly when they will have full exposure to the market or theme they have engaged in,” said Radhika Gupta, managing director and chief executive officer of Edelweiss Mutual Fund, adding that the firm’s priority is to deploy immediately NFO revenues.

The changes proposed by Sebi include a clear accountability framework.

For example, if AMCs fail to deploy funds by the specified deadline or within any extension granted, they may be subject to penalties such as restrictions on launching new programs and prohibitions on charging exit fees to investors who choose to exit the fund after 60 business days of non-compliance. . This drive for accountability underscores Sebi’s focus on investor interests by creating a more stringent oversight process.

What does this mean for investors

The proposed penalties for AMCs that fail to meet implementation deadlines protect investors from bearing the costs of delayed investments. For example, investors will be able to exit without any load if the mutual fund fails to deploy the funds within 60 days.

The proposal also suggests that AMCs should consider market conditions before raising significant funds under NFO. This means that, if necessary, AMCs can slow down the raising of funds in a highly valued market, helping to protect investors from entering the market at a potentially unfavorable time.

“This new requirement is similar to the way index funds allocate funds on day one to mimic the index,” said Joshi, the mutual fund distributor cited earlier. He clarified that this comparison does not indicate similarity in performance, but rather in the approach to financing the implementation, where active fund managers will have less opportunity to wait for ideal market conditions.

The regulations proposed by Sebi aim to ensure that investments in NFO mutual funds are made quickly, transparently and with greater accountability. Once these proposals are implemented, investors can be assured that their investments will be fully realized in line with the intended program objectives and quickly.

This would also reduce the risk of the scheme seeing a decline in profits due to carrying cash rather than putting it into the markets, especially during market growth.