New SEBI rule to make debt mutual funds less risky, more diversified

The Securities and Exchange Board of India has placed caps on the share of assets an actively managed debt fund can park in a single company's debt instruments. The move will mean that a mutual fund scheme would not invest more than 10% of its NAV in debt and money market securities rated 'AAA' issued by a single issuer. For 'AA', the exposure should not be more than 8% and for 'A' and below-rated companies, the exposure will be capped at 6%.

These rules were made mandatory for passive funds and ETFs in May 2022 and now will be consistent in active funds as well. The Sebi said that the mandated investment limits may be extended by up to 2% of the NAV of the scheme with prior approval of the Board of Trustees and Board of Directors of the AMC.

“In order to avoid inconsistency in investment by mutual funds in debt instruments of an issuer, irrespective of the scheme being actively or passively managed, it has been decided to introduce a similar credit rating based single issuer limit for actively managed mutual fund schemes,” Sebi said in the circular.


Mutual fund managers believe that this move will make the portfolios of actively managed debt mutual funds better in many ways. “This move will force greater diversification in debt funds investing into below AAA rated debt instruments. Tighter thresholds for lower rated debt should reduce the credit and liquidity risk exposure of funds,” said Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund.

Fund managers also believe that this move is a part of the many moves from SEBI to make debt funds safer after the 2018 credit crisis. These managers say that markets go through cycles of risk and reward but to have regulation in place can help with curtailing the greed for better returns.

“First of all the concentration of lower rated debt instruments in a portfolio will help make the funds safer. The portfolios will become more diversified. Even though fund managers are practicing diversification and keeping lower-rated debt at a distance already, having a mandatory regulation always helps. All these moves are basically SEBI’s attempt to make debt funds more reliable and safer for retail investors,” says Mahendra Jajoo, Head- Fixed Income, Mirae Asset Mutual Fund.