Column : Debt may yet be a good bet

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: FMP and loaded on to investors and this is capped at 1.5 per cent. It’s time Sebi clamps down on unreasonable commissions AMCs dole out just to get money flowing in.

Two, make a case for doing away with a preferential tax treatment for FMPs vis-à-vis fixed deposits (FDs). Interest income from FDs is taxed at the marginal rate of tax, but that from FMPs is taxed only at 20% with indexation. Such tax arbitrage distorts the market.

Three, make it mandatory for fund houses to continuously make disclosures on their asset quality. Some fund houses threw caution to the wind and invested in poor quality and unrated papers of companies. Investment in second grade paper of realty firms which are facing a terrible credit squeeze has already created problems for some AMCs. Sebi can ask funds to compulsorily get their FMPs rated by credit rating agencies. This will help investors take a more informed call.

Four, while it is not possible for 100 per cent matching of maturity of assets with the plan tenure, Sebi can prescribe a floor i.e. at least 95 per cent of the 180-day FMP’s corpus must be invested in assets with the same or similar maturity. Some funds floated 90-day plans but invested in 180-day paper, leading to serious asset-liability mismatches.

Last but not least, Sebi must ask the Association of Mutual Funds of India, a self-regulatory organisation, to seek disaggregated data on monthly AUM additions by fund houses. This will disincentivise the fund houses to indulge in unhealthy competition. Sebi may act now and prevent unwarranted bailouts.