Skip to main content

Sebi diktat may change essence of balanced funds

Sebi diktat may change essence of balanced funds
The Securities and Exchange Board of India’s (Sebi’s) proposed move to simplify category classifications of mutual fund schemes may lead to a change in the definition of balanced funds. The capital markets regulator has been going slow on approving balanced funds in the past few years and unofficially insisting on a 50:50 equity-to-debt mix for new scheme approvals. Currently, there is no standard definition of balanced funds.
Several fund houses already offer balanced schemes that have an equity allocation of 65 per cent or higher. This allows them to be classified as equity schemes, which enjoy a tax advantage over debt funds as capital gains become tax free after a year. Since most diversified equity funds offer a 70-100 per cent equity exposure, the regulator believes a balanced fund offering 65-75 per cent does not offer much differentiation, according to sector officials.
Fund houses, on the other hand, have been reluctant to launch balanced schemes with a 50:50 mix, fearing the schemes will lose out on performance to older balanced schemes that have higher equity allocations.
“When you say something is a balanced fund, it has to be a truly balanced fund. We don’t want the investors to regret later that they went by the nomenclature and didn’t find the fund to be balanced at all," G Mahalingam, whole-time member, Sebi, had said at a recent FICCI event.
Fund officials are worried that flows in the balanced category will migrate to the older balanced schemes with a higher equity allocation. “Within the industry, we have a caste system. So, if you came early and launched a balanced fund, you were given permission to launch multiple balanced funds. One could be a large-cap and one could be a mid-cap in which you could invest 90-95 per cent in equities. And, if you came late, you are told that only 50:50 debt-to-equity mix could be considered a balanced fund. It is important to create a level-playing field," Kotak Mutual Fund Managing Director Nilesh Shah had said at a recent Business Standard event.
The chief executive of a fund house said on condition of anonymity, “Sebi may insist on the merger of similar balanced schemes but is unlikely to ask fund houses to change the mandate or attributes of their older balanced schemes that invest more than 65 per cent in equities."
A large fund house recently engaged in a verbal spat with Sebi over the merger of its two balanced schemes, according to sources. The fund house argued that merging the two schemes would increase the size of the scheme to unwieldy proportions and be detrimental to the interests of investors.  One way fund houses have got around Sebi’s 50:50 diktat is by launching hybrid funds with an equity tilt. Since 2014, almost a dozen schemes have hit the market with an equity allocation of about 65 per cent and the rest in debt instruments. However, these schemes are not classified as balanced funds and are more defensive in nature, as over 25 per cent of the equity holding is deployed for equity arbitrage.
In the past three years, the assets of balanced funds have grown more than seven times to Rs 1.28 lakh crore as of August 2017, according to the Association of Mutual Funds in India data.
The Business standard, New Delhi, 21th September 2017


Popular posts from this blog

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

New money laundering norms stump jewellery sector

New money laundering norms stump jewellery sector Dealers with turnover of Rs 2 crore and above covered; industry says threshold too low The central government has notified the money laundering rules for the gems and jewellery sector with immediate effect. Now, any entity deals in precious metals, precious stones, or other high-value goods and has a turnover of Rs 2 crore or more in a financial year will be covered under the Prevention of Money Laundering Act, 2002 (PMLA, 2002). The limit of Rs 2 crore would be calculated on the basis of the previous year’s turnover, said the notification. The directorate general of goods and service tax intelligence has been appointed under the Act. Sources said the government’s move to apply the PMLA to the jewellery sector was a fallout of income-tax raids on jewellers soon after demonetisation last November, when it was found that they sold gold and jewellery at a huge premium and accepted old currency notes as payment. The notification, issued on Augus…

Confusion over branded food GST

Confusion over branded food GST The GST Council's statement over the weekend on applying tax on branded food items has left most of the trade confused.

Even though the Council has not changed the rates on food -0 per cent on unbranded stuff and 5 per cent on brands -many small traders who didn't levy GST earlier said they could come under the 5 per cent slab after the clarification.

While they predicted some increase in consumer prices, large players said they can absorb GST in many ways and keep prices steady.

"Trade is confused and hence on behalf of our chamber, we have asked our members to go ahead and charge 5 per cent GST," said Sushil Sureka, general secretary of the Ahilya Chamber of Commerce and Industry in Indore.

The statement clarifying the application of GST came after some businesses were found deregistering their brands and selling under corporate brand name without paying tax, after the Council exempted unbranded food from the new all-encompassing indirec…