2 min read.Updated: 04 Sep 2020, 06:06 PM ISTAvneet Kaur
Segregation of bad instrument from the main portfolio will prevent the distressed asset damaging the returns generated from more liquid and better-performing assets of the portfolio.
Last few years have not been an easy ride for debt mutual fund investors. There have been a series of downgrades and defaults by the high rated debt papers which wiped out huge money invested by the retail investors. In order to bring back and retain the trust of investors, the market regulator Sebi has made several changes in the rules for debt mutual funds. Sebi is continuously tracking the space to repair any loopholes to protect the interest of investors as well as the mutual fund houses.
Here are the top three rules which have favored debt mutual funds in recent past that you must know:
Seggregation of portfolio : In the event of credit downgrade the downgraded instrument generally becomes illiquid making it very difficult for the fund manager to dispose of such instruments. In such an event segregation of such an instrument from the main portfolio will prevent the distressed asset(s) damaging the returns generated from more liquid and better-performing assets of the portfolio. Sebi allowed seggregation of debt instruments in case of a credit event in 2018. In August this year, Sebi further allowed mutual funds to side pocket debt in cases where borrowers approach the mutual fund house for debt restructuring due to stress on account of Covid 19. This will prevent investors to invest into a toxic security.
Portfolio and yield disclosure norms: In partial modification of SEBI circular on 'Monthly portfolio disclosures', Sebi mandated mutual funds to disclose the schemes' current portfolio every 15 days instead on a monthly basis. "In addition to the current portfolio disclosure, yield of the instrument shall also be disclosed," said Sebi in its July circular.
The disclosure of yields of each instrument in the portfolio will help investors to know the quality of the portfolio and understand the level of risk taken by the scheme to a better extent.
Safer liquid funds: In order to improve risk management and ensuring sufficient liquidity, Sebi mandated liquid funds to hold at least 20% of its portfolio in liquid assets like cash, government securities, T-bills and repo on government securities at all the time. This was done after a few liquid funds witnessed a deep fall in their single-day NAVs due to credit crisis.
Sebi also notified exit load on liquid debt funds for redemptions within 7 days to deter corporates from using liquid funds to park their money for very short periods. Big purchases and redemptions from corporates can amplify the risk in these funds for retail investors.