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Mumbai: Debt funds will be more transparent and safer than before, after the markets regulator The Securities and Exchange Board of India (Sebi) introduced a slew of stricter measures for mutual funds on Thursday, experts say.
The 43-player Indian mutual fund industry has been going through tough times of late, due to delays in interest, and principal repayments by some companies.
The regulator reviewed the risk management framework of mutual funds, given the recent jitters in the debt fund space.
It said for funds investing in debt and money market instruments, the process of amortisation-based valuation would be now dispensed with completely and it will be counted on a marked-to-market basis.
“The new regulations for liquid fund make them more fairly valued.
Liquidity risk is reduced due to mandated 20 per cent in liquid holdings.
It becomes a more cleaner and safer instrument even for retail investors to stay invested in,” said Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser, India.
On Thursday, Sebi had pointed that in light of a few credit events in the fixed income market that led to increase in liquidity risk of mutual funds, a need was felt to review the regulatory framework and take necessary steps to safeguard the interests of investors and maintain the orderliness and robustness of mutual funds.
It also said that liquid and overnight schemes will not be permitted to invest in short term deposits, debt and money market instruments having structured obligations or credit enhancements.
“The rules definitely make liquid mutual funds a lot more safer as it introduces exit loads for early exits, and also ensures liquidity as liquid funds hold 20 per cent in cash equivalents,” said says Dhirendra Kumar, Chief Executive Officer of mutual fund research firm, Value Research.
That was the popular tone.
“At the margin, Sebi does make liquid funds safer for investors.
But they come at a cost which could be returns and yields.
That said, in the past, Sebi rules have bode well over a period of time, so, this should leave a positive impact over a period of time,” said Akhil Mittal, senior fund manager- fixed income at Tata Mutual Fund.
“Liquid flows are categorised by high volumes of inflows and outflows that adds to systemic liquidity risk.
Now, by saying you have to keep 20 per cent in cash equivalents, liquidity risk has reduced,” said Mittal.
Kumar pointed that the liquid schemes had the potential to create systemic risks, as they account for 40 per cent of the AUMs of mutual funds, which have been dealt with methodically Concentration of investors is also an issue.
“They wanted to make it safer.
These are pre-emptive things.
They are not very difficult to comply with.
It will make liquid funds little volatile in the near term,” said Kumar.
The markets regulator lowered the sectoral cap on liquid funds to 20 per cent from 25 per cent earlier.
Sebi also said such schemes would now be required to hold at least 20 per cent in liquid assets, such as cash and government securities to make them safer and more liquid.
The additional exposure of 15 per cent to housing finance companies shall be restructured to 10 per cent in HFCs, and 5 per cent in securitised debt based on retail housing loan and affordable housing loan portfolios.
Currently, liquid funds can have an aggregate of 40 per cent exposure to NBFCs and HFCs.
“It has reduced risk in the portfolio due to sectoral cap, and has also introduced caps on how much of credit enhancement bonds a portfolio can hold,” said Belapurkar.
“They have introduced at least four times cover for debt securities structured as loan against shares, collateral bonds.
Apart from this, they widened the scope of encumbrance, and made reporting such encumbrances beyond a Level mandatory.
These structures also just got cleaner and safer,” added Belapurkar.
The regulator said there should be adequate security cover of at least four times for investment by mutual fund schemes in debt securities having credit enhancements backed by equities directly or indirectly.
Prudential limit on total investment by a mutual fund scheme in debt and money market instruments with credit enhancements and on investment by mutual fund scheme in such debt securities of a particular group, as percentage of debt portfolio of the respective scheme have been prescribed at 10 per cent and 5 per cent respectively, Sebi prescribed.
The regulator has made early redemptions from liquid funds more expensive and strengthened norms for debt mutual funds’ lending against shares to make these products safer for investors.
It also prescribed a graded exit load on investors of liquid schemes who exit the scheme upto a period of 7 day.
“The introduction of exit load will lead to substantial reduction in asset base of liquid funds, and lead to a migration to overnight fund,” said Kumar.
“The graded exit load will discourage high inflow / outflow from investors’ end in liquid funds," said Mittal.
Sebi mandated the mutual fund schemes to invest only in listed NCDs, in a phased manner, and said all fresh investments in commercial Papers (CPs) shall be made only in listed CPs.
"When you talk of portfolio diversification, Sebi has reduced sectoral limits, any large exposure to NBFC does make the entire system prone to higher risk .
So, the move is sensible.
At the same time, it is also supporting the government policy push of affordable housing," said Mittal.
"The listing itself does not change the credit profile of the company, but it increases transparency.
We will have more information about the company, and in turn there will be more transparency and accountability," Mittal added.
All fresh investments in equity shares by Mutual Fund schemes shall only be made in listed or to be listed equity shares, Sebi had said.
It also expressed its disapproval of the so-called standstill agreement that mutual funds have reached with the indebted Essel Group.
