In a board meeting held recently in New Delhi, SEBI has proposed to make some key changes to liquid fund regulations to mitigate risks. Among its proposals are introduction of mark to market valuations of debt securities having maturity of 30 days and above, and maintaining spread between traded price and quoted price below 0.025%.
Currently, fund houses have to do mark-to-market valuations of securities having residual maturity of 60 days and above. In addition, SEBI announced that the difference between traded price and price quoted by rating agencies of a security should not exceed 0.025% instead of current difference of 0.1% (applicable in case the security is not valued basis mark-to-market).
These measures will mainly affect liquid funds, which typically run maturity up to 91 days and follow the amortization method for valuation instead of mark to market valuation.
We spoke to top fund managers to understand their perspective on the SEBI announcement
We may see liquid fund average maturity falling to 20 days, said Dwijendra Srivastava, Chief Investment Officer (Debt), Sundaram MF. He said, “Consequently, the return differential between a liquid fund and ultra-short-term fund will increase. Thus, an investor having a slightly longer holding period and higher risk appetite may look at ultra-short term funds or low duration funds.”
Talking about SEBI reducing the price tolerance band from 0.1% to 0.025%, Dwijendra says that the stricter norms will reduce the risk-taking capacity of funds and make the valuation more in line with realizable value.
Most liquid funds typically run average maturity between 35 to 40 days. However, this will reduce once the new norms become effective, said Devang Shah, Deputy Head - Fixed Income, Axis MF. According to Devang, as mutual funds will look at lower maturity papers, the portfolio churn will increase slightly. Furthermore, it will marginally reduce funding cost for corporates, housing finance companies and banks who issue money market securities for their short-term funding needs, as lower maturity papers are issued at a lower rate, he said.
Lakshmi Iyer, CIO (Debt) & Head Products, Kotak MF also expects the average maturity of liquid funds to decrease. “By tightening the norms, SEBI aims to reduce sudden price shocks in liquid funds,” she said.
Bekxy Kuriakose, Head – Fixed Income, Principal MF said, “There may be increased shift towards one month investments in money market instruments like CDs and CPs. This would reduce the overall portfolio average maturity, YTM of liquid funds and increase turnover. Some portion of the fund may be kept in mark to market assets (i.e. more than 30 day but less than 91 day assets) depending on relative attractiveness of security, availability and interest rate view.”
