{"id":560,"date":"2019-07-03T04:35:59","date_gmt":"2019-07-03T04:35:59","guid":{"rendered":"http:\/\/blog.certifiedfinancialguardian.com\/?p=560"},"modified":"2019-07-03T05:09:00","modified_gmt":"2019-07-03T05:09:00","slug":"how-sebis-new-norms-on-debt-mutual-funds-make-a-high-impact","status":"publish","type":"post","link":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/2019\/07\/03\/how-sebis-new-norms-on-debt-mutual-funds-make-a-high-impact\/","title":{"rendered":"How SEBI\u2019s New Norms on Debt Mutual Funds Make A High Impact"},"content":{"rendered":"\n

In a caustic remark, SEBI chief\nAjay Tyagi reminded mutual funds<\/a>\nof their core objective, and rightly so. \u201cMutual\nfunds investment is different from bank lending and it needs to have elements\nof safety as well as investment.\u201d<\/em><\/p>\n\n\n\n

Mutual fund houses indeed gave a\nlong rope to promoters of troubled companies at the cost of investors. At the\nboard meeting, the capital market regulator introduced a slew of new\nregulations<\/a> that intend to make debt\nmutual funds<\/a> a lot safer place for investors. <\/p>\n\n\n\n

Risk management practices that will change for debt funds are:<\/strong><\/p>\n\n\n\n

#1: <\/strong>Liquid funds will now have to hold at least 20% of their assets\nin highly liquid assets such as cash, government securities, and repo.<\/p>\n\n\n\n

Implication: <\/strong>Even in the case of any unforeseen liquidity crunch,\nliquid funds will be able to honour redemptions. The highly liquid nature of\ntheir portfolio would make liquid funds a safer but less rewarding space for\ninvestors. <\/p>\n\n\n\n

#2:<\/strong> Debt funds cannot invest more than 20% of their assets in any\nsector. Earlier, this limit was 25%. The market regulator has also reduced the\nadditional exposure to Housing Finance Companies (HFCs) to 10% from 15%\nearlier. Moreover, debt funds can invest only 5% of their assets in securitised\ndebt based on retail or affordable housing loan. <\/p>\n\n\n\n

Implication: <\/strong>Debt fund portfolios would look less skewed. Investors\nwould be less exposed to risks arising out of sectorial concentration. High\nexposure of debt funds to NBFC sector has been one of the primary factors\nbehind the on-going credit\ncrisis<\/a>. <\/p>\n\n\n\n

#3:<\/strong> All debt and money market instruments will have to value their\nportfolio on mark-to-market basis now. <\/p>\n\n\n\n

Implication:<\/strong> Earlier valuation\/s based on amortization was\npermitted up to 60 days of residual maturity. In the wake of the on-going\ncredit crisis, there were suggestions to make mark-to-market valuations\ncompulsory for all instruments with a residual maturity of more than 30 days. However,\nSEBI\u2019s decision of obsoleting valuations based on amortization would make the NAVs\nof debt funds more transparent. <\/p>\n\n\n\n

#4:<\/strong> Liquid and overnight funds won\u2019t be able to invest in\nshort-term deposits, debt, and money market securities having structured obligations\nor credit enhancements.<\/p>\n\n\n\n

Implication<\/strong>: The universe of permissible investment instruments for\nliquid funds has become smaller now. However, this will safeguard investors\nfrom getting exposed to higher credit risks through liquid and overnight funds.<\/p>\n\n\n\n

#5:<\/strong> Exits from liquid schemes<\/a> within\n7 days of investing would now attract graded exit loads.<\/p>\n\n\n\n

Implication: <\/strong>This rule will discourage investors from exiting liquid funds within the first 7 days, thereby offering fund managers more breathing space in portfolio construction. Those investing in liquid fund will need to ensure that their investment time horizon is at least 7 days. <\/p>\n\n\n\n

#6:<\/strong> Mutual Fund schemes shall be mandated to invest only in\nlisted NCDs and this would be implemented in a phased manner. All fresh\ninvestments in Commercial Papers (CPs) shall be made only in listed CPs\npursuant to issuance of guidelines by SEBI in this regard. <\/p>\n\n\n\n

Implication:<\/strong> In case of mutual funds investing in unlisted\nsecurities, exiting them becomes a tough task when they fail to find ready\nbuyers. In contrast, listed NCDs and CPs may have slightly better liquidity\nprofile as compared to their unlisted peers. <\/p>\n\n\n\n

#7:<\/strong> Mutual fund schemes can\u2019t invest more than 10% of their assets\nin debt and money market instruments with credit enhancements and group\nexposure to such securities can\u2019t be more than 5%. <\/p>\n\n\n\n

Implication: <\/strong>Capping exposure on debt instruments with credit\nenhancements will make it impossible to mask the risk with unreliable credit\nenhancement thereby offering more security to investors.<\/p>\n\n\n\n

#8:<\/strong> There should be adequate security cover of at least 4 times for\ninvestment by Mutual Fund schemes in debt securities having credit enhancements\nbacked by equities directly or indirectly. <\/p>\n\n\n\n

Implication<\/strong>: This rule will safeguard mutual funds and investors\nalike from a sudden fall in the stock prices offered for credit enhancements.\nIt will also discourage companies from utilising equity shares to secure enhanced credit; as the sanctioned\namount would be relatively lower compared to the cover required for the\nenhancement. <\/p>\n\n\n\n

In a nutshell<\/strong><\/p>\n\n\n\n

SEBI has taken a tough stance\nagainst mutual fund houses that took investors for a royal ride so far. It\u2019s\ntime for them to introspect. SEBI\u2019s restructuring of risk management framework will\ndiscourage mutual funds from taking excessive risk and mask them with complex\ncredit structures. <\/p>\n\n\n\n

Will debt funds stop giving nasty\nsurprises?<\/p>\n\n\n\n

Hopefully, yes! <\/p>\n\n\n\n

This article first appeared on PersonalFN\u00a0here.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

In a caustic remark, SEBI chief Ajay Tyagi reminded mutual funds of their core objective, and rightly so. \u201cMutual funds investment is different from bank lending and it needs to have elements of safety as well as investment.\u201d Mutual fund houses indeed gave a long rope to promoters of troubled companies at the cost of…<\/p>\n","protected":false},"author":3,"featured_media":114,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"cybocfi_hide_featured_image":""},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/560"}],"collection":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/comments?post=560"}],"version-history":[{"count":3,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/560\/revisions"}],"predecessor-version":[{"id":563,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/posts\/560\/revisions\/563"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media\/114"}],"wp:attachment":[{"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/media?parent=560"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/categories?post=560"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.certifiedfinancialguardian.com\/index.php\/wp-json\/wp\/v2\/tags?post=560"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}