Funds also investing in unrated NCDs
A floater may offer, say, 200 or 150 basis points more than the benchmark rate. So, when a MF sells a Rs 100 bond at an artificial price of Rs 105 to another fund and buys it back, both funds.
By ET Bureau |
DELHI: A floater may offer, say, 200 or 150 basis points more than the benchmark rate. So, when a MF sells a Rs 100 bond at an artificial price of Rs 105 to another fund and buys it back, both funds end up valuing the paper at Rs 105, and not Rs 100. This helps them declare a high NAV at the end of the day.
Besides investing in government securities and treasury bills, liquid and floater schemes have varying levels of exposure to such floating bonds.
However, it���s not possible to cut off-market deals in government or corporate bonds where ready prices are available and a set procedure exists for calculating mark-to-market valuations . But no such rules exist for floaters, and this is what a few funds are taking advantage of.
A liquid fund can go on doing this as long as it faces no major redemption. But it can find itself in a soup if a large corporate or institutional investor decides to pull out. At that point, the fund would receive much less than Rs 105 when it sells the floaters to meet the redemption pressure.
EXPOSURE TO NCDS
Some mutual funds, through their income schemes, are maximising exposure to unrated non-convertible debentures (NCDs) of companies , which are starved of funds.
Industry officials said mutual funds, which usually don���t invest more than 7-10 % of their portfolio in unrated NCDs, are crossing this level in search of higher returns. Though perceived to be riskier, unrated NCDs fetch better returns than rated papers.
Industry watchers said this is a dangerous trend as default risks for unrated companies could only rise, especially when interest costs are on the rise and they are facing an uncertain business outlook. Some observers fear a repeat of the late 1990s, when dozens of companies, with shaky fundamentals, were raising funds through NCDs.
Besides investing in government securities and treasury bills, liquid and floater schemes have varying levels of exposure to such floating bonds.
However, it���s not possible to cut off-market deals in government or corporate bonds where ready prices are available and a set procedure exists for calculating mark-to-market valuations . But no such rules exist for floaters, and this is what a few funds are taking advantage of.
A liquid fund can go on doing this as long as it faces no major redemption. But it can find itself in a soup if a large corporate or institutional investor decides to pull out. At that point, the fund would receive much less than Rs 105 when it sells the floaters to meet the redemption pressure.
EXPOSURE TO NCDS
Some mutual funds, through their income schemes, are maximising exposure to unrated non-convertible debentures (NCDs) of companies , which are starved of funds.
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Industry officials said mutual funds, which usually don���t invest more than 7-10 % of their portfolio in unrated NCDs, are crossing this level in search of higher returns. Though perceived to be riskier, unrated NCDs fetch better returns than rated papers.
Industry watchers said this is a dangerous trend as default risks for unrated companies could only rise, especially when interest costs are on the rise and they are facing an uncertain business outlook. Some observers fear a repeat of the late 1990s, when dozens of companies, with shaky fundamentals, were raising funds through NCDs.
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