Regulation on the investments of a Mutual Fund

The investments of a mutual fund are subject to a set of regulations prescribed by SEBI. Presently the following restrictions apply.

1. No term loan shall be granted by a mutual fund scheme
2. A mutual fund, under all its schemes taken together, will not own more than 10 percent of any company’s paid up capital carrying voting rights.
3. A scheme may invest in another scheme under the same asset management company or any other mutual fund without charging any fees, provided that the aggregate inert-scheme investments made by all the schemes under the same management or in schemes under the management of any other asset management company shall not exceed 5 percent of the net asset value of the mutual fund.
4. Transfers of investments from one scheme to another of a mutual fund are permitted provided that:
(a) Such transfers are done at the prevailing market price for quoted instruments on spot basis
(b) The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made
(c) The registration and accounting of the transaction is completed and ratified in the next meeting of the Board of Trustees, if the regulations so require.

5. A mutual fund may borrow to meet liquidity needs, for the purpose of repurchase, redemption of units, or payment of interest or dividend to the unit holders. Such borrowings shall not exceed 20 percent of the net assets of the scheme and the duration of the borrowing shall not exceed 6 months. The fund may borrow from permissible entities at prevailing market rates and may offer the assets of the scene as collateral for such borrowing.
6. A scheme shall not invest more than 15 percent of its NAV in debt instruments issued by a single issuer which are rated not below investment grade by an authorized credit rating agency. Such investment limit may be extended to 20 percent of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of Asset Management Company. This limit however, is not applicable for investments in government securities and money market instruments.

7. A scheme shall not invest more than 10 percent of its NAV in unrated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25 percent of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of trustees and the board of Asset Management Company.
8. A mutual fund will buy and sell securities on the basis of deliveries. It cannot make short sales or engage in carry forward transactions.
9. A mutual fund can enter into derivatives transactions on a recognized stock exchange for purpose of hedging and portfolio balancing in accordance with SEBI guidelines.
10. A scheme shall not make any investment in (1) any unlisted security of associates or group companies of the sponsor or (2) any security issued by way of private placement by an associate of group companies of the sponsor or (3) the listed securities of group companies of the sponsor in excess of 25 percent of the net assets.
11. A scheme shall not invest more than 10 percent of its NAV in the equity shares or equity related instruments of any one company. In sector specific funds, the investment in a single scrip shall not exceed the weightage of the scrip in the representative sectoral index/sub-index of any or 10 percent of the NAV of the scheme whichever is higher. This limit however, will not apply to index funds because in that case the exposure to a company’s stock would depend on the weightage of the stock in the benchmark index.
12. A scheme may invest in ADRs / GDRs of India companies listed on overseas stock exchange to the extent and in a manner approved by RBI. The fund will employ necessary measures to manage foreign exchange movements arising out of such investments
13. A fund scheme shall be subject to the following restrictions:
(a) It shall not invest in the schemes of any other fund.
(b) It shall not invest in assets other than in the schemes of the mutual funds except to the extent of funds required for meeting the liquidity requirements of repurchase or redemptions.–