On 26-6-2025, the Securities and Exchange Board of India (‘SEBI’), issued a circular on ‘Timelines for rebalancing of portfolios of mutual fund schemes in cases of all passive breaches’. The clarification aims to standardize the response framework for all types of passive breaches in actively managed mutual fund schemes by prescribing uniform rebalancing timelines.
Key Points:
- SEBI expands the applicability of Clause 2.9 of the ‘Master Circular for Mutual Funds’ (27-6-2024), and redefined the rules for rebalancing mutual fund portfolios, which were earlier meant only for asset allocation breaches, now applying to all types of passive breaches.
- Originally, Clause 2.9 titled ‘Timelines for Rebalancing of Portfolios of Mutual Fund Schemes’, addressed only passive breaches related to deviations from asset allocation limits caused by factors beyond the control of the Asset Management Companies (‘AMC’), such as market fluctuations or corporate actions.
- SEBI now broadens the scope to include all forms of passive breaches, covering issuer-level exposure, sectoral caps, and group-level investment limits. This includes things like going over sector, group, or issuer limits due to reasons beyond the AMC’s control.
- All passive breaches will now be subject to a 30-business-day rectification period, during which the portfolio must be aligned with the investment limits prescribed in the Scheme Information Document or SEBI regulations.
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This move reinforces uniform compliance expectations across all types of passive deviations to better protect investor interests and maintain risk consistency.
What are Passive Breaches?
‘Passive breaches happens when a mutual fund crosses certain investment limits, due to things like sudden market changes, company mergers, maturing investments, or many people withdrawing their money at once. These situations can throw the fund off balance from what was originally planned. Though unintentional, they require timely correction to maintain the fund’s risk profile and compliance.’
