Liquid funds to hold 20% in assets, mandated by SEBI

Not so long ago, the investors considered debt funds as a substitute for conventional investment avenues. Investor’s trust has been severely dented due to the recent market developments resulting in debt funds losing the credibility it had built.

To regain the investors’ confidence, the Securities and Exchange Board of India (SEBI) has come up with risk management measures.

The recent market events have increased the risk of liquidity concerning mutual funds. The credit defaults and downgrades are some of the many reasons why the securities market is affected. 

To mitigate the risk of liquidity, the market regulator has made amendments. The SEBI has mandated liquid funds to invest at 20% in the liquid assets such as cash, T-bills, government securities, and repo on government securities.

Also Read: Mutual Funds’ exposure to Nifty touches decade high

The market watchdog is thinking of levying graded exit load on liquid funds having investment period less than seven days. This is expected to have little impact when it comes to returns of the liquid funds, but it will be compensated because they offer liquidity. Also, the liquid funds will retain their status as an option to invest emergency funds.

SEBI is planning to bar liquid and overnight funds from the short-term deposits. Money market and debt instruments have structured responsibilities. For the other mutual fund schemes, the market regulator has permitted to invest up to 10% in debt securities having credit enhancements.

Furthermore, additional sub-limit of 5% is proposed for credit enhancement investments of a corporate. This restriction is touted to support portfolios to stay uncomplicated and straightforward to understand. 

SEBI has amended to slash the sectoral limit to 20% from the existing 25% to alleviate the risk of concentration of specific sectors. SEBI has decided to redesign additional exposure to HFC.