Sebi issues revised risk management framework for mutual funds

In an effort to render high standards of service, exercise due diligence, and ensure proper care in the mutual fund operations, the Securities and Exchange Board of India (SEBI) released a revised Risk Management Framework (RMF) for mutual funds.

That said, with the overarching goal of managing significant risks associated with mutual fund operations, the revised Risk Management Framework (RMF) will include a set of principles or standards, which will consist of policies, processes, and risk management.

The AMC should conduct an annual review of compliance with the RMF. The results of such reviews shall be presented to the AMC Board of Directors and Trustees for their consideration and, if necessary, direction. Trustees may submit to SEBI in their half-yearly trustee reports the findings and steps taken to manage the risk, as well as their comments.

RMF Standards

-The mutual fund’s RMF must exhibit the following characteristics:

a. Adopt a systematic, efficient, and timely manner.

b. Be an integral part of the mutual fund’s operational and strategic operations and governance framework, considering all available information, both internal and external.

c. Be tailored to the risk profile of both the AMC and the scheme, focusing on potential risks and using mitigation and control mechanisms to address uncertainty expressly.

d. Be dynamic and adaptable enough to recognise emerging hazards and make concessions for those that have ceased to exist.

b. Recognize that people and culture affect the framework’s effectiveness and that the framework must communicate with and consult with stakeholders throughout.

-Both the AMC and the scheme shall have an approved RMF policy.

-At various levels of management, there should be a framework for Delegation of Power (DoP) that covers daily risk monitoring, daily risk reporting, and corrective actions.

How will this benefit the investors?

Investment risk management will be based on reasonable investor expectations on the risks that the mutual fund will take to achieve its investment objectives, referred to as the fund’s risk profile or risk appetite.

Further, a fund’s risk profile will be communicated to investors in various ways, including its Scheme Information Document (SID) and marketing materials, which detail the fund’s investing strategy and risk characteristics.

There would also be a review of the disclosures made to investors regarding material risks such as liquidity, counterparty, credit (the quality of investments made primarily on debt based on the credit rating), investment, and other risk areas.

AMCs shall conduct a self-assessment of their RMF and practises and present a report to their Board of Directors along with a strategy for framework implementation. The AMCs must have the required processes to ensure compliance with the provisions of this circular beginning January 1, 2022.

Additionally, the AMC shall be liable for any misrepresentation made by people affiliated with the sale of mutual funds, including distributors. The distributors’ performance disclosures to investors, if any, should be accurate and fair. It should not mislead the investor by claiming that any particular time period provides a favourable return.