Mumbai, Feb. 6: The Securities and Exchange Board of India (Sebi) today moved towards lifting the restriction on mutual funds investing in other mutual fund schemes.
As a first step, Sebi has issued a concept note in partnership with the Association of Mutual Funds in India (Amfi) regarding allowing funds of fund (FoF) scheme in the market.
FoF is a mutual fund that invests in other mutual fund schemes instead of investing in securities. Such schemes are prevalent in international markets. These schemes can have different investment patterns and investment strategies as disclosed in offer documents. The investors may invest in those FoF schemes which meet their investment objectives instead of investing in different schemes of a mutual fund and keeping track of their net asset values (NAVs).
Such FoF schemes may invest in other sector-specific schemes or those schemes which have more weightage of certain stocks. They can exit from the schemes when growth prospects of those sectors are not good. The investors putting their money in one sector-specific scheme may not be able to decide when to exit.
At present, Sebi restricts investment in other mutual fund schemes under the same management or another mutual fund up to 5 per cent of the net asset value of the mutual fund. It also prohibits charging of management fees on such investments. Due to these restrictions, a mutual fund located here could not launch FoF scheme.
Earlier, mutual funds had small number of schemes, hence the concept of FoF was not feasible. Over the years, mutual funds have increased the number of schemes and it is now possible for them to launch FoF schemes, Sebi said. It is also likely that a FoF scheme may invest in mutual fund schemes of other mutual funds subject to disclosures in the offer documents.
Sebi has proposed a few amendments in the law in consultation with Amfi. The amendments stipulate that a FoF scheme shall not invest in another FoF scheme. Further, a FoF scheme shall invest its entire net assets in other mutual fund schemes, except the funds needed for meeting the liquidity requirements for the purpose of repurchases. In addition, it has also indicated that mutual fund scheme shall not invest in FoF scheme.
A committee set up by Sebi has recommended that securitiesí brokers be permitted to participate in commodity futures market to provide impetus to overall growth and infuse competition. It would also lead to increase in number of quality players, boost trading volumes in commodities and provide greater liquidity, the committee said.