A Securities and Alternate Board of India (Sebi) round issued in November 2020 mandating all debt mutual funds to carry 10% of their property in money has sown confusion within the mutual fund business.
The round was a part of a sequence of measures undertaken by the regulator to enhance the regulation of debt funds within the wake of the shock freezing of six debt funds of Franklin Templeton Mutual Fund in April 2020.
The round went into impact from 1 February 2021.
Based on a senior debt fund supervisor who declined to be named, it’s unclear how the ten% is counted for debt funds with particular mandates similar to banking and PSU debt funds, credit score danger funds and company bond funds. As an illustration, company bond funds have to take a position at the least 80% of their corpus in debt paper marked AA+ and above.
Representations from a big fund home on the matter and from the Affiliation of Mutual Funds in India (Amfi) haven’t been answered by the regulator.
The ten% norm is supposed to be a short lived association till a committee shaped by Sebi evolves everlasting norms on minimal money holding in debt funds.
Based on the aforesaid fund supervisor, the problem of debt funds with particular mandates has been referred to the committee in query.
“For instance, banking and PSU debt funds have to take a position at the least 80% of their corpus in paper issued by banks or public sector undertakings. It isn’t clear if the 80% is to be counted after deducting the ten% money holding (bringing web publicity to such banking and PSU paper at 72%) or whether or not it’s to be calculated individually (with 80% in banking and PSU debt and one other 10% in money),” mentioned the fund supervisor.
“Completely different fund homes are decoding the rule otherwise, permitting some to depart extra from regulatory mandates than others who’re taking a strict interpretation. AMCs (asset administration firms) who’re taking a large interpretation of the foundations have benefited on the expense of these adopting a strict interpretation,” he added.
A large interpretation ties up a smaller a part of the fund’s property within the mandated paper (for instance, AA+ and above debt for company bond funds).
A debt fund supervisor at a mid-sized mutual fund home concurred. “There’s lack of readability on this subject. To be on the secure facet, we’re counting the money requirement individually from the debt mandate. For instance, in a company bond fund the place 80% of property must be in paper rated AA+ and above, we’re taking 80% in such paper and one other 10% in money,” mentioned the second debt fund supervisor referred to above.
Money contains authorities securities, treasury payments and repos on authorities securities.
Liquid funds have been required to carry at the least 20% of their property in money since April 2020.
Nonetheless, since they don’t have different mandates like obligatory holding of PSU bonds, they haven’t been affected.