Capping Exposure: Step in Right Direction
Retail investors, who were lured towards debt fund investment due to its perceived lower risk and volatility, might be a worried lot now. There is a continuous flow of news that is creating volatility in the NAV of debt-dedicated mutual funds. The rising bond yield is already getting some sheen out of long duration bond funds and the latest circular by market regulator, Securities and Exchange Board of India (SEBI), is also not helping debt funds. From the start of the next financial year, SEBI has capped mutual fund investment in bonds with special features to 10 per cent of scheme assets and 5 per cent for a single issuer.
This bond includes additional Tier I bonds as well as Tier II bonds issued by banks under Basel III norms. The source of volatility is the way the valuation of these bonds needs to be done. SEBI has laid down valuation norms for such bonds, mandating that Tier I bonds should be valued as if they have a maturity of 100 years with a glide path. Earlier, they were valued as if they are maturing on their call date—the date on which the issuer may call back bonds and repay their holders.
This change will increase the duration of the debt funds and will make them more sensitive towards change in interest rate. In the current situation of rising yield this will adversely impact their valuation and the net asset value (NAV) of the funds holding them. Nevertheless, investors can get relief from the fact that the regulator has ‘grandfathered’ the existing exposure, allowing mutual funds to continue holding such bonds bought before the circular comes into effect.
What warranted such a circular from SEBI were the two incidences last year when such bonds issued by private banks were rated as junk, causing huge loss to funds holding them. I believe it is a step in the right direction by the regulator. It will make investors aware of the risks involved while investing in such debt funds. Retail investors are not adept at analysing these types of instruments and hence it becomes the responsibility of the regulator to bring in such regulation that will help to develop confidence among investors in debt funds in the long run.
SHASHIKANT