A. Categorization of Collective Investment Schemes (CIS)
Collective Investment Schemes are commonly referred to as unit trusts in Sri Lanka, where multiple investors contribute funds which are managed by a fund manager. Each Collective Investment Scheme is typically divided into units and investors take a stake in Collective Investment Schemes by purchasing its units.
The Securities and Exchange Commission of Sri Lanka (SEC) by its directive dated 1st October 2025 (the “Directive”), issued under and in terms of Section 16 of the Securities and Exchange Commission of Sri Lanka Act, No. 19 of 2021 (SEC Act), mandates the adoption of specific categorization criteria for CIS. The Directive becomes effective immediately, upon its issue date, which is October 1, 2025.
All Managing Companies and Trustees of CIS are required to be in full compliance with this Directive by April 2, 2026.
The saliant features of the Directive are set out below.
B. Definitions of Asset Allocation Strategies
The definitions set out in the Directive are crucial to understanding the investment strategies of the specified fund categories and the manner in which funds are required to be managed. The Directive distinguishes between two primary types of asset allocation: Strategic and Tactical.
“Strategic Asset Allocation” refers to an asset mix that is formulated to maintain a long-term perspective. It is designed to maintain a consistent and sustainable investment composition over time.
“Tactical Asset Allocation” refers to a strategy that permits short-term deviations. These short-term deviations are permissible specifically due to changes observed in short-term capital market investment opportunities.
C. Detailed Fund Categorization
The SEC directive mandates the adoption of seven distinct categories or types of CIS, each defined by a specific investment objective and corresponding mandatory investment strategy.
- Growth Fund
The primary investment objective of a Growth Fund is to achieve capital appreciation. This appreciation is expected to be realized over a medium-to-long-term time horizon. The mandatory investment strategy for a growth fund places a heavy emphasis on equity securities. Growth Fund is required to invest a minimum of 80% of its Net Asset Value (NAV) in equity securities. The balance of the fund’s assets must be invested in fixed income instruments. In terms of specific allocation constraints, the Directive mandates that the Strategic Asset Allocation to equity securities must be a minimum of 80% of the NAV. The Tactical Asset Allocation to equity securities is permitted at 60% of the NAV for a period of six months. - Balanced Fund
The investment objective of a Balanced Fund is dual in nature: to achieve both capital appreciation and periodic returns. Like the Growth Fund, this objective is targeted over a medium to long term time horizon. The investment strategy for the Balanced Fund focuses on maintaining an equilibrium between asset classes. The fund is required to invest to maintain a balanced portfolio between equity securities and fixed income instruments in the ratio of 60:40.
The Strategic Asset Allocation requirements reflect this balanced approach. The Strategic Asset Allocation to equity securities must maintain a minimum of 60% of the NAV. The directive also provides tactical leeway for this category. The Tactical Asset Allocation to Equity is at a minimum of 40% of the NAV for a period of six months. - Income Fund
The overriding investment objective for an Income Fund is to provide investors with a regular and steady income. To fulfill this objective, the investment strategy mandates a high concentration in fixed income instruments. The fund is required to invest a minimum of 70% of the NAV in various types of fixed income instruments. The Directive explicitly lists the types of instruments permissible within this 70% minimum allocation. These instruments include government securities, corporate debentures, bonds, money market instruments, and cash and cash equivalents. - Money Market Fund
The objective of a Money Market Fund is to provide investors with regular short-term returns and liquidity. This is achieved by investing in a portfolio that consists of diversified short-term debt securities and money market instruments. The investment strategy dictates that the fund may invest a minimum of 90% of the NAV in money market instruments. The permissible money market instruments are specified as those stated under Appendix 5 of the CIS Code published in Extraordinary Gazette No. 2278/27 dated 7 May 2022. - Gilt Fund
The objective of investment for a Gilt Fund is specifically to invest in government securities and repurchase agreements in government securities. This fund is required to invest a minimum of 80% of the NAV in instruments identified as government securities such as, treasury bills, treasury bonds, and repurchase agreements (repo) on government securities. - Index Fund
The objective of an Index Fund is to focus on replicating market performance. The goal is to achieve medium-to-long-term capital appreciation by seeking to replicate the performance of the selected Index. To successfully replicate the target index, the investment strategy requires significant investment alignment. The fund is mandated to invest a minimum of 90% of the NAV in securities of a particular index. - Sector Specific Schemes
The investment objectives of a Sector Specific Schemes are twofold: to provide capital appreciation and specifically to capture the performance of a particular industry. This objective is targeted during a specific phase of an economic cycle. The investment strategy ensures concentrated exposure to the chosen area. This fund is required to invest a minimum of 90% of the NAV in the specific sector or industry of the economy that the scheme focuses on.
D. Summary
This directive establishes a comprehensive and highly prescriptive framework for the categorization of Unit Trusts in Sri Lanka, detailing minimum allocation percentages, strategic and tactical restrictions, and specific investment objectives for seven mandated fund types, all under the authority of the SEC Act. The directive emphasizes mandatory compliance for Managing Companies and Trustees of CIS by 2 April 2026.
For further information, please contact:
Aloka Nandasena, Partner, D. L. & F. De Saram
aloka@desaram.com
