Sebi eases investment rule for passive funds: What this means for you

Traditionally, all mutual funds, including passive funds, were restricted from investing more than 25 per cent of their assets in companies belonging to the same group as the fund manager (called the sponsor group). This rule aimed to prevent conflicts of interest and ensure diversification within mutual funds. Passive funds, unlike actively managed funds, track a specific index. Their goal is to mirror the performance of that index as closely as possible. Some sectoral or thematic indexes (focusing on specific sectors or themes) might have a high weighting (importance) for companies within the sponsor group. This weighting could exceed the 25 per cent limit imposed on traditional mutual funds.As a result, passive funds were often unable to perfectly replicate the target index, potentially leading to tracking errors and a slight underperformance compared to the benchmark. For example, ABC Nifty 50 Index Fund cannot invest more than 25% of its NAV in ABC Bank and ABC Life Insurance despite the fact that Nifty 50 has 30% weightage in ABC Bank and ABC Life Insurance. Sebi said, “This restricts the passive funds to effectively replicate the underlying index, in cases where group companies of sponsor comprise more than 25% in the index. This also puts such AMCs to a relative disadvantage as compared to other AMCs who may not have a sponsor group company(ies) comprising more than 25% in the underlying index.”

Sebi now has a solution: In a move to improve the efficiency and competitiveness of passive funds in India, Sebi has increased the investment limit for passive funds in sponsor group companies. Here's the key change: What this means for investors: Accurate tracking: With this increased flexibility, passive funds can now invest closer to the weightage of sponsor group companies within their target index. This leads to a more accurate reflection of the index's performance in the fund. Enhanced efficiency: Passive funds can now function more efficiently by staying true to their mandate of tracking the chosen index. Enhanced efficiency: Passive funds can now function more efficiently by staying true to their mandate of tracking the chosen index.Wider investment options: This change could potentially lead to the development of new Index Funds and ETFs that track more specialized indexes with higher weightage for specific sectors or themes. It's crucial to remember that even with the relaxed limit, passive funds still operate under overall investment restrictions. These include limitations on holdings in a single company and total exposure to companies beyond the sponsor group.

- Business Standard 01thMay, 2024

Data storage norm splits digital payments industry

Data storage norm splits digital payments industry India’s nascent digital payment industry could be thrown into disarray due to the demand by the Reserve Bank of India (RBI) that all user data be stored within the country, fears an industry grouping, which has termed the decision as “heavy-handed”, even as others, including the country’s largest digital payment provider Paytm, have hailed the move. In a bid to narrow the growing schism, the industry is planning to send a formal representation to the regulator highlighting its concerns, a top official told ET. “We are trying to build a consensus on the issue," said the person adding that the representation to the central bank will be ready this week. RBI on April 6, mandated all payment companies—global and local—to set up data storage facilities within India by October. The stringent six-month deadline has attracted the ire of several sections of the industry that fear it will lead to a disruption of wel...

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Sebi to finalise options in commodities today

The Commodity Derivatives Advisory Committee of the Securities and Exchange Board of India ( Sebi) will meet on Friday with senior officials of the latter, to give a final shape to the rules on options trading in commodity futures, beside revising the warehousing norms to ensure good delivery on settlement. The decision taken, after discussing with the advisory committee, will be placed before the regulator’s board, to finalise the regulations. According to knowledgeable sources, three commodities in each segment, agricultural and non- agricultural, have been proposed for introducing options. It appears commodities from the soya and guar segments are preferred in the former. From the non- agri segment, it is likely that gold, silver and crude oil will be finalised. All these These have better liquidity and both the National Commodity and Derivatives Exchange and the Multi Commodity Exchange, respectively, will be able to introduce the options. In the equity segments, options ar...

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