In April this year, investors were spooked after a large mutual fund house wound up six of its debt fund schemes, citing unprecedented redemption pressures and increased illiquidity in lower-rated securities due to the COVID-19-fuelled market volatility. This, in turn, had an adverse impact across the industry as redemption pressures increased in other debt funds too.
Although things have stabilised since, COVID-19-related uncertainty persists. An expert committee is now going to be set up to frame a stress-testing methodology for debt funds, and Securities and Exchange Board of India (SEBI) will also mandate minimum holding of liquid assets by all debt fund schemes, so that they can meet any sudden rise in redemption requests in the future.
“SEBI is facilitating setting up of an expert committee to frame a stress-testing methodology encompassing liquidity, credit and market risk for all open-ended, debt-oriented mutual fund schemes and to design a framework to determine the minimum asset allocation required in liquid assets, taking into account the nature of scheme, assets, types of investors, outcome of stress testing, minimum redemption requirement during gating etc…,” Ajay Tyagi, chairman of SEBI, said in his address to the Association of Mutual Funds of India.
Amid the liquidity crunch earlier this year in the corporate bond market, the market regulator had allowed debt mutual funds to include government securities and treasury bills in core asset allocation of credit risk funds, corporate debt funds, banking and PSU debt funds to meet the heightened redemption requests.
Now, “taking into account the recommendations made by the mutual fund advisory committee, SEBI would be stipulating a minimum holding of liquid assets by all debt-oriented schemes,” Tyagi said.
Meanwhile, SEBI is deliberating on having a limited-purpose central clearing corporation for guaranteed settlement of tri-party repo trades in all investment-grade corporate bonds including those below AAA rated, to boost repo trading in corporate bonds. As major holders of corporate bonds, mutual funds, who regularly have buying or selling needs, would be one of the biggest beneficiaries of a liquid market.
SEBI also plans to set up a back-stop facility to instil confidence of market participants in corporate bonds, especially in below-AAA-rated corporate bonds.
“The back-stop facility would be an entity, which can trade in the relatively illiquid corporate bonds and be available in times of stress to buy such bonds from various market participants in the secondary market. SEBI is examining setting up of such a back-stop facility in consultation with various stakeholders,” said Tyagi.
The mutual fund industry has seen strong growth in the last few years, with the total assets under management touching close to Rs 28 lakh crore. Tyagi, however advised that protecting the interest of investors was the primary duty of mutual funds, and all the decisions taken by fund houses would have to be in the best interest of the investors.
“Mutual funds must remember at all times that there is a difference between investing and lending. Mutual funds are not banks and should not attempt to behave like one. Unlike banks, there are neither capital adequacy requirements for mutual funds, nor do they have the ‘lender of last resort’ comfort as banks have from RBI,” said Tyagi.
Last week, SEBI announced a detailed structure for multi-cap equity funds, under which at least 25 per cent of the portfolio will have to be invested in large caps, midcaps and small caps each. Until now, there was no mandatory percentage allocation for each category, and many multi-cap funds were found to be biased towards large caps, with some funds having as much as 80 per cent to 90 per cent of their investments in large caps.
The new SEBI circular had come in for a lot of criticism from across various circles, with some saying it would constrain the go-anywhere flexibility multi-cap funds had. Tyagi said the confusion that arose post its directives was unfortunate and all the schemes should be true to their name.
“When we said that multi-caps should have some portion in small cap and midcap, we are not forcing anyone to invest in those caps. We are saying investment should be done in the best interest of the investors. If you are giving the label, then the scheme form should be as per the name,” said Tyagi.
He said the regulator has received a representation from AMFI on the issue, which is actively being examined, and SEBI will see how its intention can be further clarified.
