[Read:<\/strong> Steps from\nSEBI to Safeguard the Interest of Mutual Fund Investors<\/a>]<\/p>\n\n\n\n (Image source: pixabay.com; photo\ncredit: geralt)<\/p>\n\n\n\n Marching ahead,\nvery recently, SEBI has further refined valuation norms for debt and money\nmarket securities vide a circular.<\/p>\n\n\n\n Among a host of\nthings, the regulator has prescribed a \u2018Waterfall Approach\u2019 to arrive at a\nsecurity level pricing. <\/p>\n\n\n\n The principles adopted under the \u2018Waterfall Approach\u2019 as prescribed by SEBI are<\/em>:<\/strong><\/p>\n\n\n\n Further,\nconsidering the importance of polling in the valuation process, the capital\nmarket regulator has directed the Association of Mutual Funds in India (AMFI) to issue guidelines on polling by valuation\nagencies — who will also be appointed by AMFI. <\/p>\n\n\n\n Plus, AMFI is expected to issue guidelines on the responsibilities of\nmutual fund houses (or Asset Management Companies) in\nthe polling process, as part of the aforesaid Waterfall Approach. <\/p>\n\n\n\n The SEBI circular\nsays the guidelines shall inter-alia include the following\u2026<\/p>\n\n\n\n The capital\nmarket regulator has asked AMFI to ensure that valuation agencies have documented\nthe Waterfall Approach and that it should be done in consultation with SEBI.<\/p>\n\n\n\n Notwithstanding\nthe above, SEBI has also updated the definition of traded and non-traded money\nmarket and debt securities as under:<\/p>\n\n\n\n Further, since\nthe valuation methodology for thinly traded debt securities is same as\nnon-traded debt securities, SEBI has done away with a separate definition of\nthinly traded debt securities. <\/p>\n\n\n\n Do note that the\ncircular states that the concept of Non-Performing Assets (NPAs) may not be\nrelevant for the mutual fund industry, and hence the guidelines for\nidentification and provisioning of NPAs has been deleted and replaced with securities\nclassified as \u201cbelow investment grade\u201d or \u201cdefault\u201d.<\/p>\n\n\n\n For valuation of\nsecurities \u201cbelow investment grade\u201d and \u201cdefault\u201d, the capital market regulator\nhas stated: <\/p>\n\n\n\n The regulator has\neven gone on to define the treatment of accrued interest, future interest\naccrual and future recovery, in case of money market and debt securities\nclassified as \u201cbelow investment grade\u201d or \u201cdefault\u201d. It is detailed as below:<\/p>\n\n\n\n As regards using\nown trades for valuations, it has come to the regulator\u2019s notice that Mutual\nFunds have used their own trades of relatively small quantity in order to value\nthe entire holding of such security.<\/p>\n\n\n\n In order to\nprevent possible misuse, it is prescribed mutual funds not to use their own\ntrades for valuation of debt and money market securities and for Inter-Scheme Transfers\n(ISTs). <\/p>\n\n\n\n If the mutual fund\nhouse makes a change to the terms of investment, which in turn may have an\nimpact on valuations, the regulator has said that it will be required to be reported\nto the valuation agencies immediately.<\/p>\n\n\n\n There are many more facets and fine points that SEBI has prescribed to value money market and debt securities. To access the circular, click here<\/a>. <\/p>\n\n\n\n The objective:<\/strong><\/p>\n\n\n\n The broader\nobjective of the aforesaid guidelines is to ensure that the mutual fund\nindustry follows the best practices, whereby the robustness of valuation of\ndebt & money market securities improves. <\/p>\n\n\n\n What if there is a deviation?<\/em><\/p>\n\n\n\n As per the principles of Fair Valuation specified in the Eighth Schedule of SEBI (Mutual Funds) Regulations, 1996, mutual fund houses or AMCs will be responsible for true and fairness of valuation and correct NAV. <\/p>\n\n\n\n And in case if\nthe AMC decides to deviate from the valuation price (given by the valuation\nagencies), the instance of deviation needs to be recorded along with detailed\nrationale for each by the AMC, going by the SEBI circular.<\/p>\n\n\n\n The impact on debt mutual funds\u2026<\/strong><\/p>\n\n\n\n Mutual fund houses\nare expected to strictly adhere to these guidelines in the interest of their\nown risk management and to safeguard debt mutual fund investors. Risk\nmanagement would improve. That being said, it does not make investing in debt\nmutual fund safe. <\/p>\n\n\n\n Remember, investing in debt funds is not risk-free<\/a>.<\/p>\n\n\n\n How to approach debt mutual fund schemes?<\/strong><\/p>\n\n\n\n![\"\"](\"http:\/\/blog.certifiedfinancialguardian.com\/wp-content\/uploads\/2019\/09\/article-image-28-9-2019.jpg\")
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