SEBI caps investment limit in single-issuer debt securities for active mutual funds

SEBI had introduced such limits for debt ETFs and index funds through its circular dated May 23, 2022 on ‘Development of Passive Funds’. Post the November 29 circular, it has now been extended to cover actively managed MF schemes as well. The objective of these limits is to limit the concentration risk to investors in any scheme relating to any issuer.

An MF scheme (excluding credit risk schemes) must comply with the following three limits. i.e., it should not invest more than 10% of its NAV in money market and debt instruments which are rated AAA, not more than 8% of its NAV in AA rated, and not more than 6% of its NAV in rated should not be. A and down. Credit Risk Funds as per their mandate should invest at least 65% of their corpus in below highest rated instruments (usually rated AAA and AA+) and hence, are not bound by these limits.

Further, currently, at an aggregate level, an MF scheme cannot invest more than 10% of its NAV in investment grade or rated instruments. Post the latest circular, this 10% limit can be increased to 12% of the scheme NAV with the prior approval of the Board of Trustees and Board of Directors of the Mutual Fund House. In addition, the three separate limits of 10%, 8% and 6% respectively on instruments rated AAA, AA, and A and below may also be increased to 2% with prior approval of the requisite fund house authorities, provided that Don’t violate the rules. Overall limit of 12%.

The new rules will be applicable to all newly launched schemes with immediate effect. Existing schemes will be grandfathered from the regulations till the underlying debt and money market instruments held by these schemes mature.