India equity funds can invest up to 35% of their residual portfolios in non-equity investments under a recent Securities and Exchange Board of India (SEBI) rule. The allowance could give fund managers more flexibility, while adding indirect exposure to assets that investors may already hold.
Key Takeaways
- The 35% limit applies to a fund’s residual portfolio, not its entire portfolio.
- Large-cap active funds must still invest at least 80% in large-cap stocks.
- Funds may choose whether to use the allowance; the source does not specify an effective date.
How the rule affects India equity funds
SEBI’s rule permits equity funds to place up to 35% of their residual portfolios in non-equity investments. For large-cap active funds, the permitted investments include gold exchange-traded funds (ETFs), silver ETFs and Infrastructure Investment Trusts, or InvITs.
The residual portfolio is the portion available after a fund meets its mandatory allocation requirements. Large-cap active funds must invest at least 80% in large-cap stocks and have typically used the remaining allocation for mid-cap stocks.
The change allows those funds to use some residual allocation for the specified non-equity investments instead. The available information does not specify the previous rule for such investments or an effective date for the change.
What the allowance means for investors
Gold and silver could perform well when equities decline sharply, potentially helping a fund manage volatility. That outcome is not guaranteed, and equity funds may choose not to use the allowance.
Investors who hold gold or silver ETFs directly could gain additional exposure to those metals through an active equity fund. Their overall asset allocation could therefore differ from what they intended.
The non-equity investments do not change the tax treatment of investments in these equity funds. Index funds and equity ETFs, as passive products, are required to mirror their benchmark indexes.
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Disclaimer
This FinanceVelix article provides general information, not personalized financial, investment, legal, or tax advice. Market prices, interest rates and economic conditions can change; investments carry a risk of loss. Facts reflect the material available when published and may change. Check important information independently and consult a qualified professional when needed. Mentioning an asset, company, or service is not an endorsement.
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