SEBI Clarifies Rebalancing Timelines for Mutual Funds in All Passive Breach Cases
SEBI mandates that mutual funds must follow prescribed rebalancing timelines for all passive breaches, ensuring consistent compliance across schemes.
The Securities and Exchange Board of India (SEBI) has mandated that mutual funds must adhere to prescribed timelines for rebalancing portfolios in all cases of passive breaches, ensuring uniform compliance across schemes.
The circular issued on June 26, 2025, clarifies that Paragraph 2.9 of SEBI’s Master Circular for Mutual Funds, which outlines the timelines for portfolio rebalancing, will now apply to all passive breaches across actively managed mutual fund schemes.
What are Passive Breaches?
Passive breaches occur when a mutual fund scheme’s asset allocation or regulatory investment limits deviate due to factors beyond the control of the Asset Management Company (AMC), such as:
- Corporate actions like mergers, bonus issues, or demergers.
- Sharp price movements in stocks or sectors.
- Maturity of securities in debt portfolios.
- Large-scale investor redemptions.
These breaches differ from active breaches, where limits are violated due to the AMC’s direct actions or omissions.
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With this clarification:
- All passive breaches, regardless of their type, will now follow a consistent rebalancing timeline under SEBI guidelines.
- AMCs are required to realign their portfolios promptly to match the mandated asset allocation disclosed in their Scheme Information Documents (SIDs).
- The move aims to prevent prolonged deviations that could impact investor interests or scheme objectives.
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Next Steps for Mutual Funds
Mutual funds and AMCs will need to:
- Review current portfolio monitoring systems to ensure all passive breaches are flagged and addressed within SEBI’s rebalancing timelines.
- Update internal compliance protocols to align with the clarified guidelines.
- Continue transparent disclosures to investors regarding rebalancing actions when passive breaches occur.
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