Sebi chairman Ajay Tyagi on Tuesday said an expert committee would frame policies for a stress testing methodology that would encompass liquidity, credit and market risks for all open-ended debt-oriented schemes.
The Securities and Exchange Board of India (Sebi) is working on a slew of norms for debt schemes of mutual funds such that a liquidity crisis that led to the shuttering of six schemes does not recur. Sebi chairman Ajay Tyagi on Tuesday said an expert committee would frame policies for a stress testing methodology that would encompass liquidity, credit and market risks for all open-ended debt-oriented schemes. The panel will determine the minimum asset allocation for such schemes in liquid assets, based on the assets, type of investors and outcome of stress testing. A circular is expected “very soon” Tyagi said addressing the 25th Annual General Meeting (AGM) of the Association of Mutual Funds in India (Amfi).
In a bid to improve the liquidity in bond markets beyond the top-rated papers, Tyagi said that the regulator was also evaluating a limited purpose central clearing corporation for guaranteed settlement of tri-party repo trades in all investment grade corporate bonds, including those below AAA rated, to boost repo trading in corporate bonds. He said, “As major holders of corporate bonds, the mutual funds, who regularly have buying/selling needs, would be one of the biggest beneficiaries of a liquid market. Issuers will also be significant beneficiaries of a liquid and stable market in terms of lower borrowing costs.”
Tyagi also offered some sage advise to mutual funds by saying that they should remember the difference between “investing” and “lending”. “Mutual funds are not banks and shouldn’t attempt to behave like one. Unlike banks, there are neither capital adequacy requirements for mutual funds nor do they have the ‘lender of last resort’ comfort as banks have from the Reserve Bank of India (RBI). The true reflection of their portfolio in its net asset value (NAV) on a daily basis is the cornerstone of transparency and investors’ trust,” he added.
The market regulator has also received representation from the Amfi regarding the issue of multicap schemes, which now requires them to invest of 25% each in large, mid and small cap stocks, with the balance 25% giving flexibility to the fund manager and they will be looking into the issue. “Improper categorisation of schemes will only lead to confusion amongst the investors apart from the possibilities of mis-selling. Scheme category and its performance vis-à-vis benchmark are major inputs based on which investors decide whether to invest in a scheme or not. If a scheme portfolio is not true to its label, it might be giving very different risk return exposure to the unit holders of the scheme than what they have signed up for,” added Tyagi.
To further increase the penetration of mutual funds beyond the top cities, Sebi had started incentivising mutual fund investments from beyond top 15 cities and later from beyond top 30 cities. “However, the share of B-15/B-30 cities in the total industry AUM has hovered around just15-17% over the last four years. We need to strive more to make mutual funds popular in areas beyond top 30 cities,” advised Tyagi to the fund houses.