Big news for mutual fund investors! SEBI tightens rebalancing rules, index funds and ETFs will be exempted

SEBI has issued a new rule regarding portfolio rebalancing in mutual fund schemes. Now it will be mandatory to correct all types of passive breaches within 30 working days. This change has been made to ensure the safety of investors and uniform compliance with rules.

Stock market regulator SEBI said on Thursday that now the time limit for portfolio rebalancing in mutual fund schemes will apply to all types of passive breaches. Earlier this rule was limited only to asset allocation. Passive breach means - when the asset allocation or regulatory limit in a mutual fund scheme deviates from the prescribed rules without any deliberate change. That is, this mistake is not done intentionally by the AMCs (Asset Management Companies), but happens automatically due to market fluctuations or other reasons. Now SEBI has clarified that even in such a situation, all mutual fund schemes (except index funds and ETFs) will have to rebalance the portfolio within 30 business days i.e. 30 working days.

What is 'portfolio rebalancing'?

If you are wondering what is this 'portfolio rebalancing' in mutual funds? So let's understand in simple language. When you invest money in a mutual fund, this fund divides its money into different places - shares, bonds, gold or cash. This process of division is called 'asset allocation'.

Now sometimes this ratio changes automatically without the fault of the fund manager. For example, if the price of the share increases, the share part will increase and the bond part will decrease. This is called 'passive breach' - meaning 'a little mess without any reason'. SEBI has said that now the fund manager will get 30 days to correct such changes.

Passive breach error can occur due to many reasons

Corporate action of a company (like giving bonus shares or share split), rapid rise and fall in the price of shares in the market, maturity of an investment (like maturity of a bond) or many investors withdrawing money together. Till now, in such cases, the rule was that the fund manager should re-balance the portfolio only in case of certain errors. But now SEBI has made it clear that even in case of all such inadvertent errors, the fund manager will have to correct them within 30 working days.

SEBI has also said that if the error is done intentionally, then it will be considered a violation of the rules. But even if the error has happened on its own, it cannot be ignored because it can worsen the level of risk in the fund. Therefore, it is important that whether the error is intentional or not, the fund should be corrected within the stipulated time.