The central recommendation is a 30-day window to deploy these funds in accordance with the asset allocation specified in the program.

Sebi’s efforts towards this timely deployment of NFO funds are aimed at protecting investors from prolonged delays in market exposure and ensuring that their money is actively invested as planned.

The current regulatory framework, as per the Sebi Mutual Fund Regulations, 1996 and the Master Circular, 2024, provides some deployment provisions for NFOs. Yet, there is no specific timeline in which AMCs should invest these funds as per the planned asset allocation.

Sebi’s recent review revealed cases where AMCs delayed their rollout, holding on to investors’ funds without actively investing. The reasons ranged from excessive market volatility to high valuations in specific sectors. However, Sebi believes that this uncertainty should not leave investors’ money idle for longer than necessary.

Align fund launches

According to Sebi’s findings, most AMCs deploy funds within 30-60 days, with only a few cases of delay beyond this time frame. Sebi analyzed 647 schemes, of which 633 deployed funds in less than 60 days, and 603 schemes did so in less than 30 days. Sebi’s proposal aims to reduce even the few delays if they are noticed.

Sebi has proposed that AMCs should deploy funds within 30 working days from the date of allotment of units. In cases where AMCs cannot do so, they must report in writing to their investment committee, which may grant an extension of a further 30 days, but only for valid reasons such as unusual market circumstances.

Responding to concerns raised by some fund managers regarding complex market dynamics justifying delayed rollouts, Amol Joshi, a registered mutual fund distributor, argued that “if valuations are unfavourable, they should wait to launch the scheme rather than deploying it hastily,” emphasizing the importance of aligning fund launches with advantageous conditions.

Joshi illustrated how the proposed deployment requirement could influence investment strategies. “Imagine a multi-capitalization NFO today. Previously, the fund manager could use certain timing elements to deploy new funds. However, with the 30-day delay, the fund manager will have less ability to anticipate the market and conserve liquidity,” he explained.

Guarantee accountability

Traditionally, fund managers have a wide investment window, giving them the flexibility to wait for ideal market conditions. However, Sebi’s new proposal aims to narrow this window, requiring AMCs to adhere to a stricter deployment timeline.

This regulatory push recognizes the ability of AMCs to deploy funds quickly, which Sebi says can benefit investors by ensuring their investments are quickly exposed to market growth potential.

“This approach provides clarity to investors, ensuring they know exactly when they will benefit from full exposure to the market or theme they are engaged in,” said Radhika Gupta, Managing Director and Managing Director of ‘Edelweiss Mutual Fund, adding that the company prioritizes the immediate. deployment of NFO products.

The changes proposed by Sebi include a clear accountability framework.

For example, if AMCs fail to deploy funds within the specified time frame or any extension granted, they may face sanctions such as restrictions on launching new programs and bans on charging exit fees for investors who choose to exit the fund after 60 business days of non-deployment of funds. compliance. This push for accountability highlights Sebi’s focus on investors’ interests by creating a stricter oversight process.

What this means for investors

The proposed penalties for AMCs that fail to meet deployment deadlines prevent investors from bearing the costs of delayed investments. For example, investors will be entitled to a fee-free exit if a mutual fund does not deploy the money within 60 days.

The proposal also suggests that AMCs consider market conditions before raising substantial funds in an NFO. This means that, if necessary, AMCs can slow fundraising in a high-valuation market, helping to protect investors from entering at a potentially unfavorable time.

“This new requirement is similar to how index funds deploy funds from day one to mimic the index,” said Joshi, the mutual fund marketer cited earlier. He clarified that this comparison does not imply a similarity in performance but rather in the approach to financing. deployment, where active fund managers will have less opportunity to wait for ideal market conditions.

Sebi’s proposed regulations aim to ensure that investments in NFO mutual funds are deployed quickly, transparently and with greater accountability. Once these proposals are implemented, investors can be assured that their investments will be fully deployed in accordance with the intended objective of the program and in a timely manner.

This would also reduce the risk of a system seeing its returns diminished as a result of holding cash instead of deploying it in the markets, particularly during rising markets.