If you have wondered what makes mutual funds less risky than direct investing is the fact that a fund manager has to construct a portfolio. However, the fund manager should not get carried away and put too much money into one company..or cause such harm. So the law has put some restrictions as follows:

Minimum portfolio diversification norms:

Investment in equity shares or equity related instruments of a single company are restricted o 10 % of       assets

Investment in “rated investment grade” debt instruments issued by single issuer to 15 % of NAV scheme &
may be extended to 20 % with prior approval of Board of AMC or Trustees

Investments in unlisted shares to a maximum of 10 % of NAV scheme for close end scheme
& 5 % of NAV  in open end schemes.

Invest abroad in ADR/GDR’s within an overall limit of US $ 3 billion for all funds together. There is a sub     ceiling  for individual MFS which should not exceed 10 % on net assets managed by them as on date of last audited Balance Sheet, subject to maximum of US $ 50 million per MF

MF’s under all its schemes taken together is not allowed to own more than 10 % of any company’s paid up capital carrying voting rights

A scheme may invest in another scheme under same AMC or other MF without charging any fees, provided that aggregate inter-scheme investment made by all schemes under the same management does not exceed 5 % of NAV of MF.

MFs are required to  buy & sell securities only “for delivery”

MF’s may invest in short-term deposit of schedules commercial banks, pending final investment of funds pursuant to scheme objective

MF’s not allowed to advance loans, except securities in accordance with SEBI’s stock lending scheme

MF’s prohibited from investing in excess of 25 % of net assets of any of its schemes of fund in case of listed securities of group companies of sponsor.

Inter scheme transfers at current market rates and investment objective conformity to scheme to which transfer is made.