How will SEBI's new rules impact debt fund investors?

SEBI has revised several provisions related to debt funds to make them more secure. However, their immediate impacts may not be well-received by investors. Following the implementation of the new investment norms, debt funds, particularly liquid ones, will yield lesser, fluctuate more on a daily basis and charge exit loads. It may sound hardly pro-investor; however, these norms will make them healthier, safer and more liquid. That will surely favour the long-term interest of investors. We have demystified the key announcements and their likely impacts. Summary of changes and their impacts All debt securities will now be marked-to-market Impact: NAVs will reflect truer picture but it will make liquid funds more volatile Liquid funds to invest at least 20 per cent of their money in government securities, cash and equivalents Impact: Enhance the ability of liquid funds to handle large redemptions but dent their returns Caps of funds' exposure to individual sectors, issuers, structured instruments, unlisted securities and loans against shares Impact: More diversified and better quality portfolios; Less susceptibility to troubles of individual companies, as seen in case of IL&FS Exit loads on liquid funds for redemption within 7 days Impact: Overnight funds may become more popular among corporate investors Full mark-to-market SEBI has mandated that the valuation of debt and money market instruments will now be completely based on mark to market. This is in line with its progressive emphasis on the market-based valuation of bonds in place of the amortisation method. In February 2010, SEBI had shrunk the applicability of amortization method to only bonds with a residual maturity of upto 9