Page 25 - Banking Finance September 2024

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are safe, transparent, and accessible to investors across Market Risk Management: SEBI requires mutual
the country. funds to adopt strategies to manage volatility and
potential losses in asset prices. AMCs must use risk
2. Enhanced Disclosure Norms metrics like Value at Risk (VaR) to measure the
Transparency is one of the cornerstones of SEBI’s potential losses in different market conditions.
regulatory approach. Over time, SEBI has introduced
Liquidity Risk: One of the key challenges for mutual
enhanced disclosure norms that make mutual funds more
funds is liquidity risk, i.e., the risk of being unable
accountable to investors. These norms ensure that
to meet redemption requests. To mitigate this, SEBI
investors have access to relevant and timely information mandates that AMCs must keep a portion of the fund
to make informed decisions.
in liquid assets and set limits on illiquid securities.
Monthly Portfolio Disclosure: Mutual funds are
required to disclose their entire portfolio holdings on Credit Risk Management: For debt mutual funds,
their websites at least once a month. This allows SEBI has strict guidelines on investing in credit-rated
investors to see exactly where their money is invested instruments to reduce the risk of default. AMCs are
and assess the performance and risk level of the fund. required to conduct rigorous due diligence before
investing in bonds, debentures, or any debt
Key Information Memorandum (KIM): Before
instruments.
investing, potential investors are given access to the
KIM, which highlights the essential features of the Risk-Weighted Asset Allocation: SEBI encourages
mutual fund scheme, including its investment mutual funds to diversify their portfolios across asset
objectives, risks, and past performance. This helps classes and sectors to manage concentration risk.
investors understand the product before making This helps to spread risk and avoid overexposure to
investment decisions. any single asset class or security.

Total Expense Ratio (TER): SEBI mandates that Stress Testing: Mutual funds are also required to
mutual funds disclose their TER to investors,
conduct regular stress testing to evaluate how their
ensuring they are aware of the costs associated with
portfolios would perform under extreme but plausible
managing the fund. AMCs must also explain how
adverse market conditions. This allows AMCs to
changes in the TER affect the returns on the fund.
anticipate and manage risks more effectively.
Risk-O-Meter: To simplify the understanding of
risk, SEBI introduced the Risk-O-Meter, which Conclusion
categorizes mutual funds into six levels of risk: low, The regulatory framework for mutual funds in India is
moderately low, moderate, moderately high, high, robust and continuously evolving, with SEBI playing a
and very high. This visual tool helps investors align
proactive role in ensuring that mutual funds operate
their risk tolerance with the risk level of the scheme.
transparently, safely, and efficiently. The Mutual Funds
Regulations of 1996 laid the foundation for the industry,
Enhanced disclosure norms have increased transparency
while Enhanced Disclosure Norms and the Risk
and accountability, allowing investors to track the
Management Frameworks ensure transparency,
performance of their mutual funds more closely and make
accountability, and risk mitigation. These regulations
well-informed choices.
have fostered a strong and trustworthy mutual fund
3. Risk Management Frameworks ecosystem in India, ensuring the protection of investors
Effective risk management is crucial in the mutual fund and promoting sustainable growth.
industry, as these investments are exposed to various risks,
including market risk, liquidity risk, and credit risk. SEBI As the mutual fund industry continues to grow, these
has laid down a comprehensive Risk Management regulations and guidelines will likely see further
Framework to ensure that mutual funds manage these risks refinement, keeping pace with global best practices and
in a systematic manner. Some key components include: market changes to protect investor interests effectively.

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