After introduction of side-pocketing in mutual funds, SEBI is now focussed on tightening norms for liquid funds following IL&FS episode.
A few fund officials told Cafemutual that SEBI has been considering introducing marked-to-market valuation for all debt securities. This means fund houses may have to do mark-to-market valuation of debt securities having maturity of less than 60 days. Simply put, liquid funds may become more volatile going forward.
They said that SEBI is likely to share details of new regulations at its upcoming board meeting scheduled for February 13.
A fund official who is on the Mutual Fund Advisory Committee said, “MFAC is currently deliberating on introduction of marked to market valuation of debt securities of maturities less than 60 days and having exposure of liquid funds in government and PSU bonds. The committee is expected to share its final proposals to SEBI by end of this month.”
Introduction of mark-to-market valuation of all short term bonds would encourage fund managers to hold safer papers, said industry experts.
SEBI rules say that fund houses have to do mark-to-market valuations of securities having maturity of up to 60 days and more. Liquid funds hold securities having maturity of up to 91 days. However, most liquid funds hold substantial securities having maturity of less than 60 days.
Since debt securities are illiquid in nature and not traded like equities, mark-to-market valuation is challenging for fund houses since they have to quote NAV on a daily basis. Hence, most fund houses rely on ratings by agencies to derive NAV.