Sebi requires debt funds to hold 10% of corpus in liquid assets
Liquid and overnight have been exempted from this circular. This is because liquid funds were already required to hold at least 20% of their corpus in liquid assets from April 2020
PremiumMarket regulator Sebi has come out with a circular requiring open ended debt mutual funds to hold at least 10% of their corpus in liquid assets. Liquid Assets are defined as cash, treasury bills, government securities and repo on government securities.
Liquid and overnight have been exempted from this circular. This is because liquid funds were already required to hold at least 20% of their corpus in liquid assets from April 2020. Overnight funds are allowed to invest in securities maturing in one day and hence also invest in liquid assets. Similarly gilt funds and gilt funds with 10 year constant maturity have been exempted because they are required to invest 80% of their assets in government securities, as per their category rules.
The circular has also required mutual funds to stress test their portfolios. The rules for liquid holdings will be with effect from 1st February 2021 and the stress testing rules will be effective from 1st December 2020, the circular said. Sebi has appointed a committee to formulate guidelines on liquid assets and stress testing and the norms stipulated in the circular may be revised in accordance with the committee’s recommendations.
"Debt markets tend to turn illiquid in times of crisis and a liquid buffer will help. The effect on returns of this will be marginal," said Vishal Dhawan, founder, Plan Ahead Wealth Advisors, a Sebi Registered Investment Advisor (RIA). However a debt fund manager at a mid sized fund house who spoke to Mint on condition of anonymity took a more pessimistic view. “This kind of liquidity buffer is only needed in an extreme event. Holding on to it in ordinary circumstances will take a toll on returns and investors will go to banks instead. Instead the regulatory solutions should be more geared towards improving liquidity in the underlying debt market rather than putting more restrictions on fund managers," he said.
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