With the valuation norm of liquid and ultra short term funds set to change from August 1, 2010, fund houses as well as industry experts see some redemptions from these funds triggered by the fear of volatility. As per the new norm, debt securities with maturities up to 182 days, in which liquid and ultra short term funds invest, will be valued on their weighted average market (mark-to-market) price instead of the earlier practice of valuing them on amortisation basis.
Debt papers with maturity of over 182-days are valued based on the market price every day.
The new valuation norm will make the net asset value (NAV) of liquid and ultra short term funds more volatile bringing in the element of uncertainty in returns given by these funds. Under the existing method of amortisation, the value of the securities keeps rising as the accrued interest is added to compute NAV.
Liquid funds are open-ended short-term debt funds with maturity up to 91-days, while ultra short-term funds have maturities over 91-days. Returns from ultra short-term funds are higher because they hold securities of longer durations. Because of short-term nature of these funds and near guaranteed capital appreciation, these funds are very popular among institutional and high net worth individuals.
However, with the new valuation norm coming into effect, all this is going to change. “Ultra short term funds are going to see more redemptions, because volatility would be more in this category due to slightly longer duration of the securities held by these funds,” a mutual fund expert from a brokerage house told Value Research.
Industry experts feel that a lot of investors’ money would shift from ultra-short-term funds (erstwhile liquid plus funds) to liquid funds as returns would be less volatile in the latter.
Uttam Agarwal, head, HNI business, Bajaj Capital, said liquid funds hold short-term securities and a large portion of their portfolios is invested in call money, CBLO (collateralized borrowing and lending obligations) and treasury bills that are not marked to market, thus making them less volatile than ultra short-term funds post mark-to-market norms. “Therefore, we expect some money from ultra short term funds shifting to liquid funds,” he added.
Suresh Soni, chief executive officer, DWS Mutual Fund, said, “We do expect some redemptions as we shift from one valuation method to another.”
However, he said only investors who keep their money for less than a week will shift to liquid funds. “Anyone who has a longer tenure will rather stick to ultra short-term funds, as they give better returns,” he added.
Recently, some mutual funds started charging exit load on ultra short-term funds as a precursor to the new valuation norms. This move is aimed at checking early redemptions from these funds after the new valuation norms come into effect from August 1.
Uttam Agarwal of Bajaj Capital said, “These changes will lead to a more defined tenure of investments in liquid and ultra short term funds, which are being operated by many investors as savings bank account.”
Meanwhile, speculations over extension of deadline for implementation of new valuation norms seem to be over with just a couple of days left for the new norms to kick off.
Suresh Soni of DWS Mutual Fund said, “Though Amfi (Association of Mutual Funds in India) had written to SEBI (Securities and Exchange Board of India) in this regard, we have got no hint that says the deadline would be extended.”
It was said that some fund houses were against the implementation of new norms just after the Reserve Bank of India (RBI) hiked the repo and the reverse repo rate. Fund managers were apprehensive that the drop in bond prices due to rate hike would result in drop in NAVs of liquid and ultra short term funds if the new norm is implemented.
Most fund houses – Birla Sun Life, SBI Mutual Fund, Taurus Mutual Fund, DWS, Kotak Mutual Fund and UTI Mutual Fund -- we talked to said they are ready for the change in valuation norms.
IDFC Mutual Fund has already realigned its portfolios as per the new norm, its managing director Naval Bir Kumar informed Value Research.
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