SEBI revisits risk management framework for debt funds

In a much-anticipated meeting of the market regulator, Securities and Exchange Board of India (SEBI) has introduced some far-reaching changes for debt mutual funds. These changes were made to prioritise investors' interest. All of these changes were made with respect to debt funds.

In case of liquid funds, it has been mandated that the funds should hold atleast 20 per cent of their corpus in liquid assets such as cash, Government Securities, T-bills and repo on Government Securities. Besides, the sectoral limit of holding any securities which was earlier at 25 per cent has been reduced to 20 per cent now. Moreover, exposure of 15 per cent to Housing Finance Companies (HFCs) shall be restructured to 10 per cent in HFCs and 5 per cent exposure in securitised debt based on retail housing loan and affordable housing loan portfolio. Liquid funds are also barred from investing in short-term deposits, debt and money market instruments having structured obligations or credit enhancements. A graded exit load shall also be levied on investors of liquid schemes who exit the scheme upto a period of 7 days. This is done to discourage institutional investors.

Another big change that is being introduced is the increase in the cover of security for a loan against share. It has been increased to 4 times of investment by MF schemes. Earlier, a cover of 2 times was adequate enough to lend money to promoters; however, after the debacle of Essel group and RDAG, more cover was found necessary.

The above changes introduced by the regulator are aimed to set the house in order and protect the rights of the investors following a few recent credit events which posed liquidity issue in the debt mutual funds segment. These steps are likely to bring down the expected return of these categories. Nonetheless, for investors who invest in debt funds, liquidity and safety is far more important than returns.