Mutual Fund Portfolio Management and SEBI Regulations

Analytical Studies in Mutual Fund Management

Analytical Studies: A fund manager studies the full details of the past performance of companies, including turnover, profitability, earnings, track record, and financial strength. S/he also compares these metrics with the industry in which the company falls. S/he works out projections based on news reports and discussions to assess future prospects.

Industry Outlook and Problem Assessment

Studies on Industries: A mutual fund undertakes studies of various industries to determine the outlook as well as the problems faced by the industries and, in turn, the units in the said industries.

SEBI Regulations for Portfolio Creation

The regulatory environment relating to the creation of a portfolio of various securities is a critical factor. We have discussed that a fund manager creates a diversified portfolio of securities whereby unsystematic risk is almost eliminated and systematic risk is analyzed to provide optimum returns. However, to protect general investors’ interests, the Securities and Exchange Board of India (SEBI) has placed certain restrictions on the investment by mutual funds in India as follows:

1. No individual scheme of the mutual fund should invest more than 5 per cent of its corpus in any one company’s shares.
2. No mutual fund under all its schemes should own more than 5 per cent of any company’s paid-up capital carrying voting rights.
3. No mutual fund under all its schemes taken together should invest more than 10 per cent of its funds in the shares, debentures, or other securities of a single company.
4. No mutual fund under its schemes taken together should invest more than 15 per cent of its funds in shares and debentures of any specific industry (such as cotton textiles, tea, tyres, etc.), except where a scheme has been floated for investments in one or more specified industries.
5. Privately placed debentures, securitized debt, and other unquoted debt instrument holdings shall not exceed 10 per cent in the case of growth funds and 40 per cent in the case of income funds.

Portfolio Revision and Continuous Monitoring

There are two broad aspects of portfolio management, namely, effective investment planning and the constant review and revision of investment. Constant review and revision of investment requires:

• Continuous monitoring of the quality of management of the companies in which investment has already been made.
• Continuous financial analysis and trend analysis of the companies’ balance sheets and profit & loss accounts to choose sound companies and off-load investments made in companies where the performance is lacking.
• Continuous analysis of the securities market trends.

Whereas a fund manager takes into consideration all fundamental and technical analyses while making initial purchases of securities, continuous monitoring jobs are generally performed by a research cell of the mutual funds in India.