SEBI Expands Rebalancing Rules for Active Mutual Fund Schemes

Circular No. SEBI/HO/IMD/PoD2/P/CIR/2025/92, Dated: 26.06.2025

The Securities and Exchange Board of India (SEBI), through a clarification, has extended the applicability of portfolio rebalancing provisions under Paragraph 2.9 of the Master Circular for Mutual Funds to cover all types of passive breaches in actively managed mutual fund schemes.

1. Background – Timelines for Portfolio Rebalancing

As per Paragraph 2.9 of the SEBI Master Circular for Mutual Funds, mutual fund schemes are required to rebalance their portfolios within a specified timeline if there is a deviation from the mandated asset allocation stated in the Scheme Information Document (SID).

These deviations typically arise due to passive breaches—instances where changes in asset allocation occur not due to active trading decisions but due to external factors such as:

• Market movement
• Inflows or outflows
• Rating changes
• Index rebalancing

2. Clarification Issued by SEBI

SEBI has now clarified that the rebalancing provisions shall be applicable to all types of passive breaches, not just select instances.

This clarification is specifically directed at actively managed mutual fund schemes, ensuring that:

• Any passive deviation from the SID-mandated asset allocation must be corrected within the prescribed timeline.
• Fund managers maintain consistency and discipline in adhering to the stated investment strategy.

3. Implications for Mutual Fund Industry

This move is aimed at:

• Strengthening investor protection by maintaining alignment with the disclosed investment strategy
• Reducing tracking error risks in actively managed portfolios
• Promoting transparency and accountability in portfolio management

4. Key Takeaway

All passive breaches, irrespective of their cause, will now require timely rebalancing in actively managed mutual fund schemes. Mutual funds are expected to review their monitoring mechanisms to ensure compliance with this clarified regulatory expectation.

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