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Mutual Funds: The rules have changed

New Rules for New Fund Offers

1. Initial Issue Expenses: I had written about this in an earlier post (Mutual Funds must toe the line) and there is now a clarification from SEBI about this. Note that now for all open ended schemes, no initial expenses can be charged. All initial expenses must be adjusted as part of the “entry load”. This is fantastic – now they can’t con investors with advertisements saying “no entry load”, and then adjust the money under initial issue expenses!

Closed ended funds (meaning those where you can’t buy more or sell before a certain date) can still charge initial expenses, but not entry load. And these initial expenses must be amortised and removed from the fund if the fund suddenly decides to convert to an open ended fund, or allows any investor to exit prematurely.

2. Trustees to certify NFOs: Take a look at Reliance Mutual Fund. They have Reliance Vision Fund and Reliance Growth fund, both diversified equity funds. Why did they have to release yet ANOTHER fund, called Reliance Equity Fund, with exactly the same goals? And they collected over Rs. 5,000 crore!

SEBI now will ask trustees of mutual funds to certify that a certain NFO is unique and does not have similar goals to any existing fund of the same AMC. Even if an existing fund can be modified slightly to match the new offer, the new offer will be disallowed.

The above two rules will mean a drastic drop in NFOs, but it is great for retail investors and existing investors of funds.

Dividend distribution rules

I had written earlier (Mutual Funds must toe the line) about questionable dividend distribution practises of mutual funds.

SEBI has now mandated, that:
1) Trustees will decide on dividend percentage on the day of their meeting. (Say Day One)
2) The AMC will issue the notice on the immediate next calendar day (Day Two) about the dividend in both a national English newspaper and a regional one.
3) The record date will be exactly FIVE days from the notice date (Day Seven)

Dividend details cannot be communicated before the notice, with anyone.

These changes will ensure that Mutual Funds don’t get massive investments just for the sake of a dividend. (which spoils returns for other investors)

Earlier posts about mutual funds:
Introduction to Mutual Funds
Mutual Fund FAQs
Mutual funds must toe the line
ELSS: Not that attractive?