What changes for mutual fund investors from April 1? TER tweak, life cycle funds and folio freeze option

Synopsis

New financial year brings significant mutual fund reforms. Expect revised GST, introduction of life cycle funds, and discontinuation of children's and retirement schemes. Equity funds can now invest in gold and silver, while stricter rules apply to thematic funds. These changes aim to boost transparency and investor protection.

As the new financial year begins, several regulatory and structural changes for mutual funds are set to take effect, aimed at enhancing transparency, standardisation, and investor protection.

Key changes include a revised GST structure, the introduction of life cycle funds, the closure of children’s and retirement schemes, and allowing equity mutual funds to invest a portion of their portfolios in gold and silver.

New TER rules

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Under this, the market regulator announced a major revamp of the mutual fund fee structure by introducing key changes to how fund houses charge investors and reducing the Total Expense Ratio (TER). TER will now be broken down into the Base Expense Ratio (BER - AMC controlled costs) and external charges (brokerage, regulatory levies, taxes).

The market regulator removed the additional 5 basis points (bps) that fund houses were earlier allowed to charge across schemes. With the additional charges earlier reduced from 20 bps to 5 bps in 2018, the provision for additional expense of 5 bps allowed the AMCs to charge the mutual fund schemes, which was transitory in nature.

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Charges like GST, Securities Transaction Tax (STT), CTT, and Stamp Duty will move outside the TER limits, allowing investors to see the actual cost of management.

Discontinuation of Solution-Oriented Schemes

SEBI has officially discontinued the 'solution-oriented' category, which included Retirement Funds and Children's Funds. These schemes will now be merged with other funds that have similar asset allocation and risk characteristics. In place of this category, SEBI has introduced Life Cycle Funds—goal-based investment options that automatically adjust their portfolio as investors progress through different life stages.

Introduction of Life Cycle Funds

These are open-ended funds with attributes of predetermined maturity and glide path for goal-based investing. Life Cycle Fund will be following a glide path strategy based on investing across various asset classes, i.e., equity, debt, InvITs, ETCDs, Gold & Silver ETF.

Life cycle funds will be launched with different target maturities such as 30 years, 25 years, 20 years, 15 years, 10 years, and 5 years. The market regulator has also shared how the asset allocation for funds with different maturities will work between investment in equity, debt, Gold / Silver ETFs / ETCDs / InvITs.

Stricter thematic fund rules

SEBI is placing strong emphasis on making funds ‘true to label’. Sectoral or thematic schemes—such as pharma or defence funds—will not be allowed to have more than 50% overlap with any other equity scheme. In simple terms, a sectoral fund must genuinely reflect its stated theme rather than resemble a diversified portfolio. Existing schemes have been given up to three years to align with these norms.

Value and contra funds coexist

Earlier, fund houses could offer either a value fund or a contra fund, but not both. SEBI has now allowed both categories to coexist within the same fund house, with a key condition that their portfolios must not overlap by more than 50%. This ensures that each fund maintains a distinct strategy—value funds focus on undervalued stocks, while contra funds take positions that go against prevailing market trends.

Mutual funds to use domestic spot prices for gold, silver ETF valuation

In this rule, fund houses will use polled spot prices published by recognised stock exchanges instead of the London benchmark. At present, physical gold and silver held by Gold and Silver exchange traded funds (ETFs) are valued based on the AM fixing prices of the London Bullion Market Association.

The final valuation is derived after adjusting the LBMA prices for metric and currency conversions, transportation costs, customs duty, taxes and levies, along with notional premium or discount to arrive at domestic prices.

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New conditions for intraday borrowing by mutual funds

These new conditions are issued to address temporary liquidity mismatches, while putting in place safeguards to ensure investor protection. Mutual funds are generally allowed to borrow up to 20% of the net assets of a scheme for a maximum period of six months for purposes such as meeting redemption requests, paying income distribution or settling certain trades.

However, this 20% cap will not apply to intraday borrowings, provided they meet specific conditions laid out by the regulator.

Debit freeze feature for investors

India's mutual fund investors will now be able to add an extra layer of protection to their investments. Capital markets regulator Sebi introduced a voluntary lock-in or debit freeze facility that allows investors to temporarily block any withdrawals or debits from their mutual fund folios.

Under the new framework, investors will now be able to freeze their mutual fund folios so that no units can be redeemed, switched, or otherwise debited until the lock is removed, according to a circular. The facility applies to both demat and non-demat mutual fund holdings, meaning it covers folios held in demat accounts as well as those maintained directly with asset management companies (AMCs).

The locking facility will initially be made available through MF Central, an interoperable digital platform used by investors to manage mutual fund transactions and service requests across different fund houses. The new rules will come into force from April 30.

Equity mutual fund schemes to increase allocation in gold and silver

India's markets regulator Sebi has overhauled mutual fund rules, allowing equity schemes to allocate more of their portfolios to gold and silver while tightening classification norms in the mutual fund industry.

The actively managed equity funds may invest their residual portion, up to 35% of assets after meeting core allocation requirements, in gold and silver instruments as well as units of infrastructure investment trusts. Hybrid funds will also be permitted to invest in gold and silver ETFs.

Monthly overlap disclosures

Mutual funds shall disclose category wise portfolio overlap levels i.e. equity scheme vs other equity schemes, debt scheme vs other debt schemes and hybrid vs other hybrid schemes. Such disclosure shall be published on AMC website for investor communication on a monthly basis.

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Launch of sectoral debt funds

In a significant move for debt investors, SEBI has permitted the introduction of sectoral debt funds—schemes that focus on lending to specific sectors such as financial services, energy, infrastructure, housing, and real estate. These funds can be launched provided there is adequate availability of investment-grade bonds within the chosen sector.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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