According to September 2012 circular, Sebi had given existing debt schemes one year to comply with the requirements to meet the 30% sectoral cap. While the open-ended debt schemes had adhered to the September 2013 deadline, the industry was not able to rejig the closed-ended FMP portfolios on time. So, the deadline was extended by three months to December 2013. The new deadline is March 2014.
According to experts, most fund houses may still have at least one or two such closed-ended funds that are yet to meet the sectoral cap requirement. They said the new deadline looks adequate to meet the cap requirement.
There will be an impact cost of liquidating the assets as the corporate bond market in India is not sufficiently liquid. Closed-ended assets are meant to be held to maturity and in a rising interest rate scenario the rejig of the portfolio may lead to losses, said Lakshmi Iyer, head of products & fixed income, Kotak MF.
Industry participants believe these closed-ended FMPs are holding a high percentage of NBFC and real estate papers. Several of these funds have a high concentration of NBFC papers in their portfolio which is difficult to sell as the CPs and NCDs of these companies are not traded frequently in the secondary market, said the fixed income head of a large fund house, on condition of anonymity.
The fund manager added rejigging the portfolios would mean shifting to active management, which goes against the grain of FMP investment. FMP investors have invested in a passive fund and rebalancing the portfolio would entail shifting to active management. This is against the original principles of FMP investment, said the fund manager.
In a September 2012 circular, Sebi had said mutual funds had to ensure that total exposure of debt schemes in a particular sector ought not to exceed 30% of the net assets of the scheme. This limit would exclude investments in bank CDs, CBLO, G-Secs, T-Bills and AAA rated securities issued by public financial institutions and public sector banks.
For the purpose of sectoral exposure, mutual funds follow the sector classification as detailed by industry body Amfi.
FMPs are closed-ended debt schemes with a fixed maturity date and invest in corporate debt, government securities and money market instruments. The securities are meant to be held to maturity; so final returns are not affected even if the underlying investments in these plans fluctuate.