Strict debt fund rules on anvil

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Mumbai, Nov 23: Debt-based mutual funds, which almost sunk in October, could now get a far more strict disclosure regime to keep them afloat. The chief measures include allowing non-credit rating agencies to also value the debt papers and capping the liquid funds’ exposure to bank fixed deposits at 30% of the total fund portfolio.

A set of draft guidelines circulated among the fund houses by the Association of Mutual Funds in India address three key issues. These are valuation of the debt instruments, asset liability mismatches of the funds and their portfolio make-up.

To bring in more transparency in the marketing of debt instruments, the draft paper has asked for chucking the practice of quoting indicative yields. Fund managers are obviously not excited about this restriction as they feel it would reduce the marketability of the schemes. Indicative yields mean the fund houses usually display a set of typical returns on the instruments, but with a caveat that the same level of returns cannot be assured. For instance, in September this year, the Fixed Maturity Plans—both short- and long-term plans, gave indicative yields of 11%. This has slipped to less than 10% for all the plans by November.

Further, to reflect the correct value of the investment, schemes with over a three-month maturity and holding will have to be marked to market. If the scheme invests in treasury bills, as most do, those have to be valued at traded price, and not at the issue price, to reflect the exact status of the investment holding. In this area, swaps and underlying assets were to be treated separately.

On Thursday, Sebi chairman CB Bhave had mentioned that the regulator was looking at reworking some of the guidelines for debt-based mutual funds. He had mentioned that the October phenomenon, where the industry saw an 18% decline in assets under management, was an opportunity to relook at some of the guidelines.