SEBI revises risk management framework for mutual funds

The Securities and Exchange Board of India (SEBI) has amended its risk management framework for fund houses in order to guarantee that mutual funds maintain high standards, practise due diligence, take proper care in their operations, and protect the interests of investors.

Based on input from the industry, the Mutual Funds Advisory Committee (MFAC) deliberated on the issue, and the MFAC’s recommendations were approved by the market regulator in the Risk Management Framework (RMF) for MFs.

Risk management is defined as an independent and specialised function of an asset management company in SEBI‘s new RMF. The asset management organisation should designate a dedicated risk officer for each risk, such as investment risk, compliance risk, operational risk, and cyber security. Each asset management firm should have a chief risk officer (CRO) in addition to these officials.

In June, the Sebi restricted Franklin Templeton from establishing any new debt schemes in India for two years after discovering “severe lapses and violations” at the firm when it abruptly closed multiple programmes. Franklin has filed an appeal, but has agreed not to create any new debt funds for the time being.

The RMF wants to clearly identify risk staff duties and put them on the fund house’s website. Though the CRO, along with management, is responsible for overall risk, the board of AMC and trustees should also be held accountable.

The RMF outlines the policies, procedures, roles, and risk management responsibilities of the management, AMC board, and Trustees board. “Wherever applicable, the elements of RMF have been segregated into ‘mandatory elements,’ which should be implemented by AMCs, and ‘recommendatory elements,’ which address other leading industry practises that can be considered for implementation by AMCs, to the extent relevant to them,” according to SEBI‘s circular.

In India, the mutual fund business has exploded, thanks to a surge in interest from individual investors in systematic investment plans, which allow investors to put a certain amount in schemes on a monthly basis.

According to the Association of Mutual Funds in India, assets handled by India’s mutual fund institutions climbed to almost 36 trillion rupees ($487.72 billion) in August from nearly 28 trillion rupees a year earlier (AMFI).

The fund houses have been asked to create a plan for the new RMF’s deployment. The fund houses are also required to complete a risk management framework self-assessment. The AMC should examine compliance with the RMF on an annual basis, according to the circular.

The new RMF clearly specifies the responsibility of all CXOs in asset management companies in terms of mutual fund risk management. It also covered risk identification, measurement, and management guidelines. The RMF has issued extensive rules – both mandatory and recommendatory – for the aforementioned primary risks to which the mutual fund is subject.