Securities and Exchange Board of India (SEBI) in its board meeting on January 28 has decided to tighten the valuations norms for the debt funds. It has decided to reduce the threshold for mark-to-market requirement on debt and money market securities from 91-days to 60-days.
Debt securities below 60 days will follow the amortization method while securities maturing above 60 days will require to be valued at their market prices. SEBI in its release said, “In case debt and money market securities are not traded on a particular valuation day then valuation through amortization basis shall be restricted to securities having residual maturity of upto 60 days (currently 91 days), provided such valuation shall be reflective of the fair value of the securities.”
SEBI’s intent is to get all debt instruments to be quoted at market prices, irrespective of the tenure. Market participants believe that, net asset value (NAV) of the liquid schemes will be more volatile now as securities maturing above 60 days will now be marked-to-market (MTM).
Liquid funds invest in short maturity instruments like commercial papers (CPs), certificates of deposits (CDs) and treasury bills. Currently, all securities with tenure of less than 91 days are not based on their market price but based on their worth on the assumption that maturity value will be fully realised. Earlier in 2010, SEBI had revised the valuation norms whereby debt and money market instruments' eligibility for mark-to-market valuation was reduced from 182-days to 91-days.
SEBI is yet to announce the effective date for this rule change. Fund managers will have to realign their fixed income portfolio to avoid volatility. “I hope they give us 4-6 months time to re-balance our portfolio,” says Murthy Nagarajan, head fixed income at Tata Mutual Fund.
Impact & Change
Fund managers argue that this move is unlikely to impact the way they invest. However, to avoid volatility their preference for securities maturing within 60-days will go up. Liquid funds have never slipped in value. However, venturesome liquid funds can assume limited MTM risk and bet on interest rate change by investing in securities upto 91-days maturities. Liquid funds are not allowed to invest in any security with a maturity of more than 91-days.
“With new regulations coming in, returns of liquid funds are likely to become more volatile depending upon fund manager’s investment style. We don’t expect major outflows from the liquid schemes as it is being expected. Liquid funds are for investors who want to parks their funds for shorter duration and not to earn any interest,” said Mahendra Jajoo, ED and CIO fixed income at Pramerica Mutual Fund.
With this move, the liquid funds will attain yet another safety milestone.
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