Sebi new norms will make debt mutual funds more liquid, diversified, safer

Debt mutual fund managers believe that the Sebi's move to change the investment norms for debt mutual funds will make these schemes more transparent and safer for investors. Sebi announced a host of changes in liquid funds and other debt mutual funds on Thursday.

“We believe these guidelines will go long way in streamlining the industry. Some bit of it was anticipated because Sebi had constituted working groups of mutual funds to take the feedbacks and it is basically the compendium of the feedback that have gone to them which they are trying to implement over time, said Lakshmi Iyer, CIO - debt & head - products, Kotak AMC.

Arvind Chari, head of fixed income, Quantum Advisors, said, "Sebi, as expected and rightly so, has made changes which will make liquid fund and debt funds more liquid and diversified and hopefully safer."


Sebi made it mandatory for liquid schemes to hold at least 20 per cent of the corpus in liquid assets like cash, government securities, T-bills and repo on government securities. Debt mutual fund managers said the norm will improve liquidity. However, well-managed funds are already following this practice.

Sebi also capped the sectoral limit in liquid funds at 20 per cent from 25 per cent. "The additional exposure of 15 per cent to HFCs shall be restructured to 10 per cent in HFCs and 5 per cent in securitised debt based on retail housing loan and affordable housing portfolios," the Sebi release said.

The market regulator also said the valuation of debt and money market instruments based on amortization shall be dispensed with completely and shall be based on mark to market.

"The move towards full mark-to-market for valuation was long overdue and it will remove the distortion in money markets for investors and issuers and will make liquid fund NAVs truer," said Chari.

Liquid and overnight schemes cannot invest in short term deposits, debt and money market instruments with structured obligations or credit enhancements.

"The move to curb investments in structured credit in liquid funds is welcome as anyways these instruments should have never been part of a liquid fund portfolio," Chari added.

Sebi also asked mutual funds to levy a graded exit load on investors exiting liquid schemes before seven days.

Mutual fund schemes can invest only in listed NCDs. This would be implemented in a phased manner, the Sebi release said. All fresh investments in commercial papers shall be made only in listed CPs, it added.

All fresh investments in equity shares by mutual fund schemes shall only be made in listed or to-be-listed equity shares.

For more details, read: Sebi tightens regulations for troubled debt mutual funds

Prudential limit on total investment by a mutual fund scheme in debt and money market instruments with credit enhancements and on investment by mutual fund scheme in such debt securities of a particular group, as percentage of debt portfolio of the respective scheme have been prescribed at 10 per cent and 5 per cent respectively, the Sebi release said.

There should be adequate security cover of at least 4 times for investment by mutual fund schemes in debt securities with credit enhancements backed by equities directly or indirectly, Sebi said.

"They are trying to make some sort of demarcation between liquid and other funds and trying to bring in more disclosures from the issuer’s perspective also which is why they have made listed bonds and CPs mandatory for mutual funds. They are trying to streamline the entire investment process from the mutual fund industry standpoint,” said Iyer.