The Securities and Exchange Board of India (SEBI) proposed various measures to contain and lower the risk for debt mutual funds in the country. The amendments are expected to make debt funds a lot safer, which in turn is likely to pool in more investors. Let us look into the rules SEBI has proposed for debt mutual funds and the impact it can have on investors.
Liquid funds will mandatorily have to allocate a minimum of 20% of the assets towards secure channels such as cash, government securities, and treasury bills (T-bills). This will not only improve the liquidity of debt funds but also help investors deal with redemption pressure by retaining well-performing securities during a financial crisis.
The sector-wise exposure is lowered to 20% from 25% earlier. This will not only bring down sector-based risks but also ensure a diversified sectoral investment for investors.
Earlier, 15% of the investments were oriented towards Housing Finance Companies. However, SEBI has proposed to lower the exposure level towards HFC by bringing it down to 10%. The remaining 5% will be allocated to Affordable Housing.
This will contain the risk associated with HFCs while boosting the affordable housing sector. The allocation of funds towards affordable housing, which has a relatively low-risk factor can prove to be beneficial for investors.
Valuation of mutual funds will not be amortisation-based henceforth. All debt fund instruments will be valued market to market. Though the Net Asset Value (NAV) of the funds can be subjected to non-linearity, the valuation of securities will be more congruent to the prevailing valuation in the market.
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Since structured obligations do not have a high liquidity factor, SEBI has proposed to restrict overnight and liquid funds from investing in debt market instruments which have structured obligations, credit augmentations, and short-term deposits.
In addition, SEBI has also proposed to restrict schemes from investing more than 10% on debt market instruments with credit enhancements. Furthermore, the schemes are also restricted from investing more than 5% at the group level.
Though the returns generated can take a hit with the proposal, the quality of credit, along with the security of the debt funds, shall improve over time.
Mutual funds shall be permitted to invest only in listed securities such as Commercial Papers (CPs) and Non-Convertible Debentures (NCDs). This will not only ensure transparency but also improve the quality of the funds.
SEBI has come up with a wide array of rules which will lower risk, improve security, liquidity and diversify your investments through debt mutual funds. Though the returns generated can be comparatively lower, the amendments will improve the quality of funds making the market an investor-friendly one.
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