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Business News/ Markets / Sebi asks MFs if they mis-sold funds

Sebi asks MFs if they mis-sold funds

At the regulator’s direction, the MFs released stress test results on 15 March which disclosed the time they would to sell 25-50% of small and midcap fund portfolios in the event of a market downturn

A senior MF official confirmed that Sebi had raised queries on mis-selling but that his fund wasn’t in receipt of the same until writing. (PTI)Premium
A senior MF official confirmed that Sebi had raised queries on mis-selling but that his fund wasn’t in receipt of the same until writing. (PTI)

Mumbai: India’s capital markets regulator, the Securities and Exchange Board of India (Sebi), has further tightened scrutiny on mutual funds by asking whether they mis-sold certain fund categories to investors, according to several industry executives aware of the matter. The categories under the lens include small-cap funds, retirement funds, credit risk funds and lock-in funds.

Sebi has been clearly uneasy in recent times about huge retail investments in small- and mid-cap funds. Chairperson Madhabi Puri Buch recently warned of froth in small- and mid-cap funds, and the regulator thereafter ordered stress tests on the small- and mid-cap portfolios of mutual funds in the event of market stress.

The latest move appears to be another step to keep a check on things and nip any potential issue in the bud.

Queries from Sebi to mutual fund houses have been flagged with transaction details in certain instances. Industry executives said the period of transactions under Sebi’s radar is from April 2022-December 2023. Mint could not independently ascertain where Sebi sourced transaction data from, but the regulator has the authority to ask for specific transaction data from mutual funds.

It is also unclear whether Sebi has sent enquiries to all mutual funds, or sent targeted queries to some funds only. At least one fund confirmed to Mint about receiving a query from Sebi, while others said they haven’t yet received a query, but they might.

One senior fund house executive confirmed that he received a Sebi query for one fund category that he offered. “In certain instances, the regulator has flagged transactions pertaining to high-risk funds with a lock-in period of three years-plus being sold to super-senior citizens and retirement funds along with certain other thresholds," the executive said on condition of anonymity. “These thresholds appear prima facie counterintuitive in nature."

Another senior mutual fund official confirmed that Sebi had raised queries on mis-selling, but added that his fund wasn’t in receipt of the same, a situation that remained unchanged till the time of writing this article.

"There is a query on mis-selling," he said. “It’s the regulator’s way of saying, 'We have our sights fixed on you,’" he said. “We can call and speak with investors about the risks of investing, but we find that after one phone call they normally don’t answer."

A query to Sebi remained unanswered till press time.

A third MF industry executive said that the mis-selling could also include luring investors by assuring them of attractive returns or selling long-duration funds to senior citizens who have no idea of the risks involved in investing in small caps.

A retirement fund has a lock-in period of five years or until retirement, whichever is earlier. A lock-in fund could be a fixed maturity plan, target maturity plan or ELSS (equity-linked savings scheme), where an investor is locked in for the tenure of the scheme. Credit risk fund is a bond fund that invests 65% in risky company bonds for higher returns.

The latest development comes on the back of stress test on small- and mid-cap funds ordered by Sebi, which was alarmed at the relentless money pouring into small-cap funds in particular.

The MFs released the stress test results on 15 March, which disclosed the time they would take to sell 25-50% of small- and mid-cap fund portfolios in the event of a market downturn. The idea was to make investors cognizant of the risks involved in investing in small- and mid-cap funds.

The results revealed that top small-cap funds would need 6-30 days to liquidate one-fourth of their portfolio, and 12-60 days to liquidate 50% of their portfolio under stress conditions.

Similarly, big mid-cap funds would take 4-34 days to sell 50% of their portfolio and 2-17 days to liquidate 25% of their portfolio in the event of a drawdown.

In the current fiscal year through February, small-cap funds have attracted net investor flows of 34,103.29 crore, followed by mid-cap funds’ 17,339.38 crore, even as large-cap funds have witnessed outflows of 4,949.27 crore.

Investors in small caps have already been rocked by a pullback of 8.5% in the Nifty Small Cap 250 index from its record high of 15,489.5 on 7 February to 14,167.85 on 26 March.

The Nifty Midcap 150, too, has fallen 3.7% from its record high of 18,345.1 on 8 February even as the Nifty fell by just 2.3% from its record high of 22,526.60 on 11 March.


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Sashind Ningthoukhongjam
Sashind writes on personal finance, mutual funds, and all things money. He is a regular host of the 'Why Not Mint Money?' podcast.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
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Published: 27 Mar 2024, 06:01 AM IST
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