The Securities and Exchange Board of India (SEBI) has introduced a significant regulatory change for asset management companies (AMCs), mandating the deployment of funds raised through new fund offers (NFOs) within 30 days of unit allotment. This new rule, effective from April 1, 2025, aims to ensure that AMCs only raise funds that can be reasonably deployed within a short timeframe, thereby curbing the potential for mis-selling of mutual funds. Until now, there was no specified period for fund deployment, which often led to delays.
According to SEBI's circular, AMCs are required to outline achievable timelines for fund deployment in the Scheme Information Document (SID) of each mutual fund scheme. This documentation must align with the fund's asset allocation strategy. "The AMC shall deploy the funds garnered in an NFO within 30 days from the date of allotment of units," the SEBI circular stated.
In the event that AMCs cannot adhere to this timeline, they must provide a written explanation to their investment committee, which may grant an additional 30-day extension if justified.
AMCs' trustees are tasked with monitoring the deployment of NFO funds, ensuring they are invested within the stipulated timeframe. Failure to comply with these deployment timelines will result in significant penalties. AMCs that do not deploy funds as specified will be barred from accepting new flows into the scheme and prohibited from levying exit loads if investors choose to withdraw after 60 days. This regulatory adjustment comes in response to observed delays caused by large fund sizes and market volatility.
The investment committee plays a crucial role in overseeing these extensions. SEBI clarified that "The Investment Committee shall not ordinarily give part or full extension where the assets for any scheme are liquid and readily available." This stipulation is designed to prevent unnecessary delays and ensure that funds are deployed efficiently. Additionally, fund managers have the flexibility to adjust the NFO period based on market conditions, except for Equity Linked Savings Schemes (ELSS).
To further prevent the mis-selling of mutual funds, SEBI has directed AMCs to ensure that distribution commissions for NFOs are lower than those for existing schemes during switch transactions. The Association of Mutual Funds in India (AMFI) is expected to develop detailed guidelines regarding distribution commissions in consultation with SEBI. These measures aim to safeguard investors by promoting transparency and fair practices in the mutual fund sector.
The implementation of these latest regulations by SEBI seeks to enhance the operational integrity of the mutual fund industry. By enforcing a strict 30-day window for the deployment of NFO funds, SEBI aims to boost investor confidence and ensure that mutual fund schemes are executed with transparency and alignment with their stated objectives. This initiative is part of SEBI's broader strategy to protect investors and maintain stability in the financial markets amidst evolving economic conditions.
NFOs in 2024
Asset management companies introduced 239 new fund offerings (NFOs) in 2024, raising a total of Rs 1.18 trillion. Sectoral or thematic equity funds were the preferred choice among investors, according to a report by Germinate Investor Services Research.
This figure marked an increase from the 212 NFOs that raised Rs 63,854 crore in 2023 and the 228 NFOs that garnered Rs 62,187 crore in 2022. The NFO landscape has seen significant growth, with offerings increasing from 81 in 2020 to 239 in 2024. Furthermore, funds raised through NFOs more than doubled from Rs 53,703 crore in 2020. These developments indicate a strong growth trend and greater investor confidence in the market.