The capital market regulator SEBI has proposed to set the outer limit of 90 days for mutual funds to deploy the funds raised through a new fund offer and not allow them to launch another NFO till it deploys the previous funds raised as per the asset allocation mentioned in the SID (scheme information document).

Further, SEBI also intends for fund houses to refrain from levying exit loads on investors who exit such schemes after 90 days of not complying with the asset allocation of the scheme.

Mutual funds have to submit a report to Trustees on each deviation in the deployment of NFO funds, said SEBI in a consultation paper issued on Wednesday. Market participants are invited to submit their views before November 20.

Asset allocation

In the last three financial years, SEBI said in 603 out of the 647 NFOs, AMCs achieved asset allocation as per SID in less than 30 days from the date of unit allotment. Further, cumulatively, in 633 NFOs, the AMCs took less than 60 days to achieve the asset allocation. Therefore, 98 per cent of NFOs were able to achieve asset allocation as specified in the SID in less than 60 days, it said.

“Compelling fund houses to deploy money in a prescribed period will only make them take riskier bets and put investors’ money in jeopardy,” said a fund house CEO.

“As per SEBI submission 98 per cent of fund houses are deploying funds in 60 days, which itself is a positive indicator given the current market dynamics,” he added.

Deployment delays

The root causes for the delay in the deployment of NFO funds were expensive valuation in certain sectors, market dynamics, uncertainty following geopolitical developments and the unavailability of securities with specific maturity.

If markets are overvalued or there is a lack of investment avenues, SEBI said it is appropriate for AMCs to slow down collection instead of delaying the deployment of NFO funds.

Currently, SEBI norms provide mutual funds with an option to alter the asset allocation for a short-term period on defensive considerations. However, the term “short-term period” is not defined under the regulatory framework. SEBI has sought investors’ opinion on defining the short-term period as 30, 60 or 90 days.