In a move to bring in standardised practices in the mutual fund industry, especially in the debt market segment, Securities & Exchange Board of India (Sebi) on Tuesday asked mutual funds to value all money market and debt securities with residual maturity of up to 91 days at the weighted average price at which they are traded on the particular valuation day.
If the valuations with residual maturity of over 91 days then, it will be valued at weighted average price at which they are traded on the particular valuation day. Sebi said, ?When such securities are not traded on a particular valuation day they shall be valued at benchmark yield/ matrix of spread over risk free benchmark yield obtained from agencies entrusted for the said purpose by the Association of Mutual Funds of India (Amfi).? These agencies include Crisil and Icra.
This comes at the backdrop of the turmoil faced by the mutual fund industry in October 2008. It was a time when several funds had a huge asset liability mismatch wherein liquid instruments were issued with underlying assets being illiquid.
?Moreover, the methodology of valuing debt instruments was arbitrary and many funds used it to their advantage. Now it will be more standardised and there will be independent agencies monitoring this,? says Dhirendra Kumar, CEO Value Research and also a committee member of the Advisory Committee on Mutual Funds.
The valuation norms would be applicable with effect from July 1, 2010. ?From July1 the way we look at liquid funds would be different from the view now,? adds Kumar. He points out that despite all the turmoil, one never saw the net asset value of liquid funds dip.
From a fund?s perspective, Nandkumar Surti, JP Morgan AMC, CIO head fixed income says, ?This move was expected as it was on the anvil for a long time. And now fund managers will have to be strict about choosing the right tenure, especially above 91 days.?
Interestingly, Sebi has also brought under its purview non-listed debt schemes. It has also said that, if valuations of securities are not covered under the above valuations that, such mutual funds shall report immediately to Amfi. Further, at the time of investment Asset management companies shall ensure that the total exposure in such securities does not exceed 5% of the total AUM of the scheme.
All mutual funds shall provide transaction details, including inter scheme transfers, of money market and debt securities on daily basis to the agency entrusted for providing the benchmark yield/ matrix of spread over risk free benchmark yield. Submission of data would help in daily matrix generation and would improve uniformity and accuracy of valuation in the mutual funds industry.
