In a significant move to bolster investor protection and maintain the integrity of mutual fund investments, the Securities and Exchange Board of India (SEBI) has issued a new circular dated June 26, 2025. This circular clarifies and reinforces the regulatory expectations regarding how and when mutual fund portfolios must be rebalanced in the event of passive breaches of asset allocation or regulatory limits.
What Are Passive Breaches?
Passive breaches are deviations in a mutual fund’s portfolio from the mandated asset allocation or regulatory limits that arise not from deliberate action or negligence by the Asset Management Companies (AMCs), but from external or unavoidable events. These events can include:
Market movements causing a sharp increase or decrease in the price of securities
Corporate actions such as mergers, stock splits, or bonus issues
Security maturities
Large-scale investor redemptions
Such changes may inadvertently result in the fund violating prescribed issuer, group, or sector exposure limits—raising risks that must be swiftly managed.
The Regulatory Response
Under SEBI’s earlier Master Circular for Mutual Funds, paragraph 2.9 provided timelines for portfolio rebalancing in cases of asset allocation deviation. However, the application of these timelines to other types of passive breaches, such as sector or issuer limit breaches, was not fully clear.
To address this, SEBI, based on the recommendation of the Mutual Funds Advisory Committee (MFAC), has now made an important clarification:
“The provisions prescribed under paragraph 2.9 of the Master Circular shall be applicable for all types of passive breaches for the actively managed mutual fund schemes.”
This essentially extends the same timeline requirements that previously applied to asset allocation breaches to all types of passive breaches, including those involving prudential investment limits.
What Does This Mean for Mutual Funds?
Standardized Timelines: AMCs will now be required to correct all passive breaches—including sector, group, and issuer limits—within the specified timeframes already set in paragraph 2.9 of the Master Circular. This ensures consistent treatment of such breaches across the board.
Heightened Compliance Oversight: Even if a breach occurs passively, AMCs must act promptly to rebalance the portfolio and bring it back in line with regulations. This places a stronger onus on compliance teams to monitor portfolios continuously and act within strict deadlines.
Improved Investor Protection: By enforcing time-bound rebalancing even for passive breaches, SEBI aims to reduce the risk exposure to investors and enhance transparency.
Conclusion
SEBI’s latest circular is part of its ongoing effort to strengthen the regulatory framework for mutual funds in India. By mandating stricter adherence to rebalancing timelines even for passive breaches, the market watchdog sends a clear message: investor interests and regulatory compliance remain paramount.
AMCs and trustees must take note of this clarification and ensure that their internal systems and monitoring mechanisms are robust enough to detect and correct such deviations promptly. This step is yet another reflection of SEBI’s proactive stance in safeguarding the mutual fund ecosystem.
