SEBI to make liquid MFs rules more rigid
SEBI is considering the proposal to make rules of investment in liquid mutual funds more rigid. To restraint volatility inflows with the challenges faced by the companies defaulting on debt as recently done by IL&FS (Infrastructure Leasing & Financial Services). SEBI may also plan to have a short lock-in period for investments in liquid mutual funds in which investors such as large companies can park their idle cash. It may also lead towards side-pocketing or segregation of troubled debt instruments and may also make it mandatory for liquid mutual funds to mark-to-market the value for all the debt instruments with a maturity of 30 days or more.
Currently, liquid funds are required to mark-to-market for debt instruments whose maturity is more than 60 days. A lock-in period in a liquid fund, for reducing the volatility inflows, may lose its fame among the institutional investors. Liquid funds are more popular among the institutional investors due to the fact that they don’t have any entry or exit load and though it might not give them any good returns compared to other debt mutual funds.
To meet the capital adequacy norms what most of the banks do is that they churn their portfolios at the end of the quarter by selling the securities before a three-month period. This is done to avoid providing an account of these securities while calculating capital adequacy and banks repurchase the securities within a week or so. Due to this, the situation of volatility arises. Liquid funds invest in debt securities with a maturity of less than 90 days. Currently, liquid funds calculate NAV (Net Asset Value) based on indicative prices for debt instruments with a maturity of less than 60 days provided by the rating agencies and marking-to-market other debt securities. However, if this is changed to debt securities with a maturity of 30 days or more, then the proportion of debt instruments whose mark-to-market value is considered would increase while calculating NAV. This though would give a right picture to the investors, but we may also see fall in NAV of certain funds.
SEBI has appointed MFAC (Mutual Fund Advisory Committee) and the panel is likely to discuss this issue in a meeting scheduled for this week.