SEBI Flexes Rules: Equity Funds Get New Investment Powers

The Securities and Exchange Board of India (SEBI) has updated regulations, permitting equity funds to invest up to 35% of their residual portfolio in non-equity assets. This allows funds, such as large-cap active funds which must invest at least 80% in large-cap stocks, to allocate the remaining portion to assets like gold ETFs, silver ETFs, and Infrastructure Investment Trusts (InvITs).

The primary aim of this regulation is to provide a mechanism for stabilizing fund portfolios when equity markets experience sharp declines or significant volatility. By incorporating assets like gold and silver, these funds can potentially mitigate losses during downturns.

This change may impact investors' core portfolios, which are typically designed to meet long-term financial goals. Investors who already hold direct investments in gold and silver ETFs might find their overall exposure to these commodities increasing unintentionally through their equity funds.

While the tax treatment of these equity funds remains unchanged, the increased allocation to non-equity assets could lead to a skewed asset allocation for investors. For those concerned about unintended diversification into non-equity assets, investing in index funds or equity ETFs is suggested, as these passively managed products strictly mirror their benchmark indices.