INSUBCONTINENT EXCLUSIVE:
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
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.
