New MF rules to come into effect from January 2021

Lately, the Securities & Exchange Board of India (SEBI) has put up its sleeves and came up with a slew of new rules for mutual funds. The market regulator came up with such amendments in order to protect investors’ interest by gaining more transparency. Post the entire Franklin Templeton episode, SEBI also went ahead to issue norms to make debt funds safer. SEBI has given fund houses, a lot of time to comply with the new amendments. In this article, we have listed a few rules that would come into effect from January 2021.

NAV calculation

Presently, if you buy any unit of mutual funds, you would get the same day’s net asset value (NAV), depending upon the cut-off timing. This is irrespective of the amount getting credited to the account of the asset management company (AMC). Though such a thing still persists for investments over Rs 2 lakh yet now with the new rule, the NAV applicable would be of that date, when the funds are actually realised at the end on AMCs.

The new version of riskometer

Recently, SEBI has released guidelines via its circular pertaining to the new version of riskometer. Previously, the riskometer depicted the overall risk profile of the category. However, with the new system, it would depict the risk profile of individual funds. Further, SEBI has introduced a new risk category of ‘very high risk’. AMCs need to evaluate the risk profile on a monthly basis and disclose the same along with its portfolio disclosure on the websites of theirs as well as on Association of Mutual Funds in India (AMFI) and also, communicate the same with its unitholders within 10 days from the end of each month. Also, AMC needs to publish a history of riskometer change every year.

Labelling of dividend option

SEBI has recently announced the labelling norms for dividend options for mutual funds, which will come into effect from January 2021. The market regulator has renamed the dividend options as income distribution cum capital withdrawal. This is actually a welcome move as the dividend is often misunderstood as the one that we receive from stocks. This change makes it very clear and would also stop the mis-selling that was happening, where intermediaries used to sell it similar to the money-back plans of life insurance and show the expected projected cash flows.