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Making liquid funds safer could lead to slightly lower returns

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MUMBAI: Tighter regulatory norms for liquid funds will likely make this category of investments safer, truly liquid and distinct from other debt-fund categories, although returns might marginally decline in the bargain. The Securities and Exchange Board of India (Sebi) is looking to reduce liquidity risks in liquid funds by asking fund houses to invest at least a fifth of their portfolios in cash and equivalents.

Doing so will reduce returns marginally. “Currently, the average holding of liquid funds in Gsecs and Tbills is 10-15%.

With new regulations stipulating 20% in cash, investors should brace for marginally lower returns,” said Raj Mehta, fund manager, PPFAS.

Currently, the liquid fund category, as per data from Value Research, has returned 6.94% in the last one year. With NBFC and HFC exposure as high as ?4.02 lakh crore at the end of May 2019, the regulator felt it was time to reduce sectoral caps by 5%, with the cap on sectoral limit coming down from 25% to 20%. “Sebi is looking to reduce sector concentration risk by reducing sector caps.

This will impact liquid fund investments in certain sectors like financials and they will need to reallocate to other sectors which could impact portfolio yields.

By doing away with amortisation all together, liquid fund returns will be more volatile, while the above measures will bring down overall returns,” said Kaustubh Belapurkar, director – research, Morningstar Investment Adviser India. “By bringing down sectoral exposures, the scheme will reduce risk in the fund, which will bring in additional safety for investors,” said Pankaj Pathak, fund manager, Quantum Mutual Fund. Another move by the regulator to raise the cover to four times for credit enhanced securities will make the loan-against-shares market very costly for mutual funds, simultaneously making it safer for investors. Fund managers believe it is difficult to predict by how much returns on liquid funds will come down, but 25 basis points could be the extent of potential decline in returns. To differentiate products, the regulator is also looking to introduce graded exit loads up to a period of 7 days in liquid funds.

This will reduce lumpy inflows and outflows from liquid funds. “This move will also make a clear demarcation between liquid and overnight funds.

This will likely lead to greater flows into overnight funds while reducing the risks associated with investing in liquid funds,” says Gautam Kalia, head - investment solutions, Sharekhan by BNP Paribas. Advisors also believe this move will distinguish one debt fund category from another.

Many institutional investors buying for a single day could move to overnight funds, while retail investors with a three-month perspective could move to ultrashort-term funds.




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