Illiquid securities in a mutual fund: the 15% rule

Illiquid securities in a mutual fund are the holdings a scheme would struggle to sell at a dependable price: non traded shares, thinly traded shares and unlisted equity. SEBI does not ban them. It caps them, and it applies an unusual penalty above the cap: anything held beyond the threshold is valued at zero. That rule, and the disclosure that goes with it, sits in one short paragraph of the SEBI Master Circular for Mutual Funds. This guide covers what the category is, what the cap does, and where it shows up in the monthly file. It is not investment advice.

What is the 15 percent illiquid securities cap?

Paragraph 10.7.1 states it in a single sentence. The aggregate value of illiquid securities under a scheme, defined as non traded, thinly traded and unlisted equity shares, shall not exceed 15 percent of the total assets of the scheme, and any illiquid securities held above 15 percent of the total assets shall be assigned zero value.

The second half is the part that changes behaviour. Most investment limits work by prohibiting a purchase. This one works through valuation: the excess portion still exists in the portfolio, but it carries no value in the net asset value. A scheme that drifts above the line therefore sees the consequence in its NAV rather than in a compliance notice alone.

How are illiquid securities disclosed?

Paragraph 10.7.2 sets two obligations, both attached to the monthly portfolio file. All AMCs must disclose the scheme wise total illiquid securities in value and as a percentage of the net assets while disclosing monthly portfolios to unit holders. And in the list of investments, an asterisk mark must be given against all investments recognised as illiquid securities.

The prescribed portfolio format reinforces this from its own side. Its guidelines require a double asterisk against thinly traded, non traded and illiquid securities, and its footnote list separately requires the total value and percentage of illiquid equity shares.

That leaves the same file carrying an asterisk convention with more than one meaning, since an asterisk is also used for weights below 0.01 percent of NAV and for debt instruments below investment grade or in default. The legend on each file is what resolves it, and the marks are worth reading rather than stripping. The full set of conventions is in how to read a mutual fund portfolio statement.

Why the category matters when reading holdings data

Two reasons, both practical.

First, a percentage to NAV next to an illiquid holding is a valuation output, not an observed market price. Non traded and thinly traded securities are valued under the Master Circular's valuation chapter rather than marked to a live quote, and above the 15 percent line part of the position carries no value at all. Comparing that weight to the weight of a large listed stock treats two different kinds of number as the same kind.

Second, unlisted equity in a scheme portfolio does not join up with company side ownership records the way listed equity does. A listed holding can be cross read against the quarterly shareholding pattern. An unlisted one has no such counterpart, so it appears in the fund side record and nowhere else.

Where this sits in the disclosure set

The illiquid total is one of several figures that reach investors through the monthly portfolio file rather than through a document of their own, alongside the derivative exposure total, the foreign securities total, and the count of valuation deviations covered in what is a valuation deviation disclosure. For the obligation that carries all of them, see what is a monthly portfolio disclosure.

Flock reads scheme holdings from these disclosures with the period end date attached to every row. What a scheme held, and how much of it was illiquid on that date, is a matter of public record. What that implies is your own call.