Amendments in debt fund rule one must know
In the past few years, debt mutual funds have been undergoing a rough patch. It witnessed a series of downgrades and defaults by the high-rated debt papers. This made the retail investors stare at deep negative returns. Hence, in order to bring back the trust as well as to protect the interest of the investors, Securities and Exchange Board of India (SEBI) made several amendments in the rules for debt mutual funds. SEBI is constantly monitoring this space to remove the loopholes present and also to protect the interest of the investors as well as the asset management companies (AMC). In this article, we have listed the top three debt mutual fund rules that have been amended in the recent past and which every debt fund investors, must be aware of.
Segregated portfolio
When the fund houses face credit downgrades, the paper that is downgraded usually becomes illiquid. This makes it difficult for the fund manager to exit such papers. In such a case, detaching such papers from the main portfolio helps prevent the distressed assets from hurting the returns generated by more liquid and better-performing assets in the portfolio. Therefore, SEBI in the year 2018, allowed segregation of debt instruments in case of a credit event. However, recently, SEBI further tweaked this rule to allow mutual funds to side pocket those debt papers, where borrowers approach them for debt restructuring due to stress amid COVID 19. This change will help investors to avoid investing in toxic security.
Disclosure norms
SEBI partially modified its circular on 'monthly portfolio disclosures', where it mandated mutual funds to disclose its current portfolio every fortnightly instead of monthly. Further, SEBI’s July circular stated that ‘in addition to the current portfolio disclosure, yield of the instrument shall also be disclosed.’ This will help the investors to understand the quality of the portfolio as well as the risk taken by the scheme.
Making liquid funds safe
SEBI has mandated liquid funds at all times to hold at least 20 per cent of its portfolio in liquid assets like cash, government securities, T-bills, and repo on government securities. This will help to improve risk management and ensure sufficient liquidity. Amid the credit crisis, a few liquid funds witnessed a deep fall in their net asset values (NAV) in just one day.
Further, SEBI also notified via a circular that any redemption from liquid funds within seven days, exit load should be levied. This will put off corporates from using liquid funds as an avenue to park their money for a very short duration. Usually, big purchases and redemptions by corporates may intensify the risk in liquid funds for retail investors.