SEBI introduces Riskometer labeling norms on dividend options for mutual fund schemes

The Capital market regulator SEBI has reviewed the guidelines for product labeling in mutual funds and has decided to introduce, ‘Very High Risk’ as the sixth risk profile for the MF schemes. According to SEBI notification, this new mutual fund rule shall be in force with effect from January 1, 2021, to all the existing schemes and all schemes to be launched on or thereafter. However, mutual funds may choose to adopt the provisions before the effective date.

At present, the Riskometer depicted five risk areas such as Low, Moderately Low, Moderate, Moderately High, and High Risk.  Now ‘Very High Risk’ is added as the sixth risk profile for the MF schemes. Hitherto, the risk was being denoted category-wise, now risk level is denoted scheme-wise. The calculation of the risk value of the scheme portfolio will be based on the methodology specified by the regulator. Further, the Mutual Funds are required to assign a risk level for schemes at the time of launch of scheme /New Fund Offer based on the scheme characteristics. Any further change in riskometer will have to properly communicate to the investors by way of Notice cum Addendum and by way of an email or SMS to unitholders of that particular scheme. They also need to update the riskometer on a monthly basis on their websites and the AMFI website, within 10 days from the end of the month. Mutual Funds also have to publish a history of riskometer changes every year.

The Capital market regulator also introduced labeling norms for the dividend options of mutual funds which will come into effect from 1st April 2021. Dividends can be distributed from the realised gains of mutual funds under Sebi rules.  Distinctly, SEBI introduced labeling norms for the dividend options of mutual funds which will come into effect from 1st April 2021. Under the new norms, mutual funds will have to rename dividend options as income distribution cum capital withdrawal. “There is a need to clearly communicate to the investor that, under dividend option of a Mutual Fund Scheme, a certain portion of his capital can be distributed as dividend”, the notification said.

SEBI has also introduced a liquidity parameter. As per liquidity parameters prescribed by SEBI, for both equity and debt schemes, a higher risk weight to be assigned to the schemes investing in relatively illiquid securities.