The central recommendation is a 30-day window for deploying these funds in line with the asset allocation specified in the scheme.
Sebi’s push for this timely deployment of NFO funds aims to protect investors from prolonged market exposure delays and ensure their money is actively invested as intended.
The current regulatory framework, as per Sebi’s 1996 Mutual Fund Regulations and the 2024 Master Circular, lays out a few deployment provisions for NFOs. Yet, there is no specified timeline within which AMCs must invest these funds per the intended asset allocation.
Sebi’s recent review found instances where AMCs delayed deployment, holding on to investor funds without actively investing. The reasons ranged from excessive market volatility to high valuations in specific sectors. However, Sebi argues this uncertainty shouldn’t leave investors’ money idle longer than necessary.
Aligning fund launches
According to Sebi’s findings, most AMCs deploy funds within 30–60 days, with only a few instances of delays beyond that. Sebi analyzed 647 schemes, of which 633 deployed funds in under 60 days, with 603 schemes doing so in less than 30 days. Sebi’s proposal is aimed at reducing even the few delays if found.
Sebi has proposed that AMCs deploy funds within 30 business days from the date of unit allotment. In cases where AMCs cannot do so, they must report in writing to their investment committee, which may grant an extension of another 30 days, but only for valid reasons such as unusual market circumstances.
Addressing concerns raised by some fund managers about complex market dynamics justifying delayed deployments, Amol Joshi, a registered mutual fund distributor, argued that “if valuations are unfavourable, they should wait to launch the scheme rather than deploy hastily”, emphasising the importance of aligning fund launches with favourable conditions.
Joshi illustrated how the proposed deployment requirement could influence investment strategies. “Imagine a multi-cap NFO today. Previously, the fund manager could employ some timing elements in deploying new funds. However, with the 30-day timeline, the fund manager will have less ability to time the market and hold on to cash,” he explained.
Ensuring accountability
Traditionally, fund managers have had a wide window to invest, giving them the flexibility to wait for ideal market conditions. However, Sebi’s new proposal seeks to narrow that window, requiring that AMCs stick to a stricter deployment timeline.
This regulatory push acknowledges the AMCs’ capability to deploy funds quickly, which Sebi believes can benefit investors by ensuring their investments are promptly exposed to the market’s growth potential.
“This approach provides clarity for investors, ensuring they know exactly when they will gain full exposure to the market or theme they’ve committed to,” said Radhika Gupta, managing director and chief executive of Edelweiss Mutual Fund, adding that the company prioritises immediate deployment of NFO proceeds.
Sebi’s proposed changes include a clear accountability framework.
For instance, if AMCs fail to deploy funds within the specified timeline or any granted extension, they may face penalties such as restrictions on launching new schemes and prohibitions on charging exit loads for investors who choose to exit the fund after 60 business days of non-compliance. This push for accountability highlights Sebi’s focus on investor interests by creating a stricter oversight process.
What this means for Investors
The proposed penalties on AMCs who fail to meet deployment timelines protect investors from bearing the costs of delayed investments. For instance, investors will be allowed a load-free exit if a mutual fund does not deploy the money within 60 days.
The proposal also suggests that AMCs consider market conditions before collecting substantial funds during an NFO. This means that, if necessary, AMCs may slow down the collection of funds in a high-valuation market, helping to shield investors from entering at a potentially unfavourable time.
“This new requirement is similar to how index funds deploy funds on day one to mimic the index,” said Joshi, the mutual fund distributor quoted earlier. He clarified that this comparison does not imply a similarity in performance but rather in the approach to fund deployment, where active fund managers will have fewer opportunities to wait for ideal market conditions.
Sebi’s proposed regulations are intended to ensure that investments in mutual fund NFOs are deployed promptly, transparently, and with greater accountability. Once these proposals are implemented, investors can be assured that their investments are fully deployed as per the scheme’s intended objective and in a prompt manner.
It would also lower the risk of a scheme seeing a drag on its returns due to carrying cash instead of deploying the money in the markets, especially during a market run-up.
