INSUBCONTINENT EXCLUSIVE:
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
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
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
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.