SEBI plans to allow investors to make safer mutual funds more secure, as well as to limit the purchase



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Sebi is to introduce tough new rules to protect investors in liquid assets, which are the most basic offer in the basket of mutual funds, from credit risk.

Return to safety

Current funds allow investors to park money for a short period of time, ensuring easy liquidity and high security. Investors can use their money on the next business day (based on T + 1). Several liquid assets also offer instant redemption up to 50,000 Rs per day. The security aspect stems from the positioning of liquid assets in very short bonds, which are not influenced by major fluctuations in the bond market. These assets can only be invested in instruments with a maturity of up to 91 days. This ensures that fund managers do not tolerate unnecessary interest rate risk. Funds sit on the lower part of the risk chart for bond funds – overnight funds are a truly secure offer of investors returns similarly to a bank fixed deposit. While liquid assets are mostly used by institutions, financial planners advise individuals to park their excess money, so that free money can earn more than what a savings account could make.

However, the rules do not mention the extent of the credit risk that these funds can take. Fund managers can exercise their discretion to invest in instruments with a higher yield on issuers whose repayment capacity may not be strong. While most of the leading funds in the home have prevented the management of credit risk, some funds expose them to lower credit quality instruments in order to increase profitability and thus jeopardize security.

Due to the default of issuers, there was a steep decline in NAV assets

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Source: Ace MF

Introduction of security measures

The reports say that the goal of the regulator is to provide safer funds with liquid assets. Funds can now now mandatory mark to market all instruments with a maturity of 30 days or more. At this time, funds do not need to mark marketable securities that fall below 60 days. The value of these bonds is based on prices provided by credit rating agencies. Marking on the market means that the fund must evaluate bonds in the portfolio at the prevailing market price.

"Improving the MTM requirements will bring transparency, as the NAV will accurately reflect the value of the underlying portfolio," says Kaustubh Belapurkar, director, Fund Research, Investment Investor for Morningstar Investments. A mandatory lock-in period can also be introduced to reduce volatility by checking purchases. However, this will not be in the interest of investors, says Vidya Bala, Head, Mutual Fund Research, FundsIndia. "Determining the exit limits is the purpose of liquid assets," he says. It suggests avoiding irregularities from credit assessments in order to prevent low-quality documents from being found in liquid assets.

In the past, instruments issued by defective companies such as Amtek Auto, Jindal Steel and Power and IL & FS and its subsidiaries were identified in liquidity portfolios. The failure of these issuers led to a sharp fall in NAVs of these assets. In the IL & FS episode, some funds lost around 3-5% in one day, resulting in a half-year profit. Some of the schemes were fully displayed by the IL and FS exhibition, which caused the NAV to reach a hit to this extent. The assets were faced with heavy purchases due to default. This lack of stability is alarming and needs to be addressed, experts say. R Sivakumar, Head of Fixed Income, Axis Mutual Fund, says that liquid assets need to be more resilient to credit risk. "Investors in the current fund expect a high level of security and liquidity, do not worry about higher returns," he says. Arvind Chari, Head of Income, Quantum Consultants, says: "Many liquid assets have not met the dual objectives of security and liquidity over the past few years. Investors deserve liquid assets without any credit risk."

Regardless of the changes, investors must keep away from the bad eggs in the basket that do not invest in accordance with the risk profile presented by these funds.

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