Debt fund norms to be overhauled

Debt fund norms to be overhauled
Joydeep Ghosh & Priya Nadkarni / Mumbai November 24, 2008, 0:07 IST
Sebi meets mutual fund body today to consider changes Fixed Maturity Plans (FMPs) may no longer be permitted to announce indicative portfolios and indicative yields to investors if the Securities and Exchange Board of India (Sebi) accepts the recommendations of the Association of Mutual Funds in India (Amfi) at a meeting here on Monday.
This is part of a package of recommendations that Amfi is making to boost investor confidence in FMPs that invest in debt and liquid and liquid- plus funds.
FMPs saw average assets under management (AAUM) fall by Rs 10,718 crore in October, the first time in the last six months.
The proposal to scrap “indicative portfolios” has arisen because investors have sometimes found deviations of as much as 80 per cent between the indicative and actual portfolios. In some cases, the entire corpus has been invested in a single instrument.
Sebi will also consider Amfi’s suggestion of a 3 to 6 per cent exit load for FMPs, a minimum tenure of three months and a faster processing of redemption payouts at transaction (T) plus five days against T+10 specified in the rules (although some smaller redemptions are processed as soon as T+1 or 2).
The draft proposal also includes a host of measures intended to reduce volatility and force fund managers to play safe by reducing the asset-liability mismatch. For instance, the Amfi committee has suggested that liquid funds, which have a maturity between one and three months, must have a minimum 30 per cent allocation to cash, collateralised borrowing and lending obligations (CBLO), bank fixed deposits, treasury bills and others — all safe and liquid instruments.
Amfi has also recommended that 30 per cent of the investment can be made in bank fixed deposits (FDs). At present, funds are allowed to invest up to 15 per cent in bank FDs, 20 per cent with board approval.
Amfi has also said the exit option should be preferred over listing FMPs because the latter does not provide the investor with liquidity. Also, the maturity-mismatch has to be contained at 10 per cent of the tenure of the instrument or one month, whichever is lower
Besides the safety of liquid fund instruments, Amfi has suggested extending their duration to a maximum of 90 days.
Amfi has also recommended that all fixed-rate instruments above three months should be marked to market. Today, all fixed rate instruments beyond six months are marked to market.

For debt funds, the valuation of the underlying papers is currently based on Crisil’s valuation matrix. Amfi has proposed outsourcing these valuations to an independent third party.
Fund managers, however, are divided over these proposals. For instance, most Amfi members felt that the practice of announcing indicative returns should continue.
Others felt some of these moves could make the funds more illiquid. “According to RBI regulations, banks can refuse the overdraft facility against their own FDs. So it doesn’t really make sense to increase the overall exposure cap to FDs,” said a debt fund manager