Mutual funds may stay away from perpetual bonds in the long run

Mumbai: Mutual funds, hitherto major buyers of perpetual bonds, could stay away from buying new issuances or existing papers that would have a call maturity beyond March 2023 after the Securities and Exchange Board of India’s revised guidelines still left a gap between the suggested and market valuations of these instruments.

“New perpetual bond issues will have to seek a new set of buyers as mutual funds may stay away from additional purchases of AT1 bonds after the guidelines,” said Dhawal Dalal, CIO-fixed income at Edelweiss Asset Management. “Funds are likely to focus more on managing their existing stock of AT1 bonds and their potential impact on their portfolios.”

Sebi on Monday eased the norms for valuation of perpetual bonds by mutual funds after the finance ministry’s intervention to ease the concerns of the bond market and the asset managers over the rules. Mutual fund schemes holding perpetual bonds will now have to value these securities under maturities up to 30 years in a phased manner until March 31, 2023. If an issuing company does not exercise the scheduled call option, the perpetual bonds will be valued as a 100-year paper.