Here's Why SEBI Wants NFO Proceeds to be Deployed Within 30 Days

Moreover, they have built their product basket recognising what's in favour among investors---for instance, the launch of several Index Funds and Exchange Traded Funds, Sector & Thematic Funds, and Small Cap Funds.

The AMFI data reveals, that New Fund Offers (NFOs) have considerably contributed to the inflows. Investors have been enticed by the Rs 10/- investment proposition. So, the Assets Under Management (AUM) of the Indian mutual fund industry has increased not just by mark-to-market gains but also by inflows into a variety of schemes.

However, now the capital market wants the proceeds of the NFOs to be deployed systematically in line with the mandate of the scheme and a reasonable period of time and to discourage any mis-selling of NFOs.

During the examination of the periodic submissions made by Asset Management Companies (AMCs), SEBI observed that, in a certain instance, there was a considerable delay in the deployment of the funds collected through NFO.

The delay could be attributed to a variety of reasons --- the size of the funds collected, expensive valuations in certain sectors or market capitalisations, macroeconomic and geopolitical development, volatility in the market, unavailability of security with specific maturity, and so on.

The capital market regulator, SEBI, does recognise that considering the size of the corpus required to be deployed could be significantly large, suitable flexibility is required for the fund managers to deploy the funds according to his/her/their views on the market. But the AMC should not retain the proceeds received through NFO, for an indefinite period without deployment in the stated assets.

Now pursuant to views or feedback shared on the consultation paper for the deployment of NFO proceeds by the Mutual Fund Advisory Committee (MFAC) and the other stakeholders at large, the regulator has decided the following concerning the deployment of funds collected by an AMC in an NFO:

• The AMC shall specify achievable timelines in the Scheme Information Document (SID)of a scheme regarding the deployment of the funds as per the specified asset allocation of the scheme and garner funds during the NFO accordingly.

• The AMC shall deploy the funds garnered in an NFO within 30 business days from the date of allotment of units.

• In an exceptional case, if the AMC is not able to deploy the funds in 30 business days, reasons in writing, including details of efforts taken to deploy the funds, shall be placed before the Investment Committee of the AMC.

• The Investment Committee thereafter after examining the root cause of the delay in deployment, may extend the timeline by 30 business days, while also making recommendations on how to ensure deployment within 30 business days going forward and monitoring the same. The Investment Committee shall not ordinarily give part or full extension where the assets for any scheme are liquid and readily available.

• The trustees shall be required to monitor the deployment of funds collected in NFO and take steps, as may be required, to ensure that the funds are deployed within a reasonable timeframe.

Now in case the AMC has not been able to deploy the funds as per the asset allocation mentioned in the SID as per the aforesaid mandated plus extended timelines, it has been decided by the regulator that the AMC shall not be permitted to receive fresh inflows.

Furthermore, the AMC shall not be permitted to levy exit load, if any, on the investors exiting such scheme(s) after 60 business days of not complying with the asset allocation of the scheme. It will be mandatory to inform all investors of the NFO, about the option of an exit from the concerned scheme without exit load, via email, SMS or other similar modes of communication.

Also, the deviation, if any, would be required to be reported to the Trustees at each of the above stages.

Note that the aforementioned provisions will apply to all NFOs. Earlier, at the time of consultation, the MFAC had recommended that Index Funds and ETFs should be excluded.

The regulator has given some leeway to extend or shorten the NFO period (except for Equity Linked Savings Scheme (ELSS)), based on the view of the market dynamics, availability of assets and his ability to deploy funds collected in NFO. This shall help the fund manager to effectively manage the fund flows.

In case the investor switches from an existing scheme managed by the AMC into an NFO from the same AMC, to discourage mis-selling by mutual fund distributors, SEBI has directed that the AMC shall ensure that the distribution commission paid is lower than the commissions offered under the two schemes of switch transaction.

Keep in mind that these changes are effective from April 1, 2025, and are in the interest of investors at large.

The 30-day timeframe for deployment of funds ensures that investor's money is put to work quickly reducing the risk of idle capital and is in line with the mandated asset allocation. In other words, the mutual fund houses would need to ensure that their deployment strategy aligns with the investment mandate of the scheme. If the fund does not follow the rules, directing fund houses not to levy exit load offers sufficient flexibility to investors.

As an investor, you should thoroughly read the SID when considering NFOs (or even existing schemes for that matter) and add mutual fund schemes that are in congruence with your risk profile, broader investment objective, the financial goal/s you are addressing, the time in hand to achieve those envisioned goals and ensure that a best-suited asset allocation is followed.

Be thoughtful in your approach.

Happy Investing!

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.