SEBI Chairman Ajay Tyagi sent a stern message to those AMCs, who have made unwarranted risky investments in their debt funds for higher returns at the AMFI AGM 2019 held in Mumbai.
Tyagi said, “The safety of the investment cannot be compromised for want of higher yields.”
The SEBI Chairman further said, while the market regulator have taken steps to restrict such risky investments, the industry as a whole needs to do its own analysis on a regular basis to avoid such situations in future.
Tyagi emphasised there is a clear distinction between lending and investing. “A mutual fund’s investment strategy needs to have required elements of safety as well as returns. While making an investment, the mutual funds have to necessarily take into account their mandate and organizational structure. Mutual Funds do not have risk capital and are essentially pass through vehicles wherein NAV ought to reflect the correct value of assets held at any time. This is an important aspect, which MFs should keep in mind while making debt investments,” he said.
Tyagi further pointed out how a credit event in one issuer/group could have a contagion effect leading to liquidity risk across the market.
Since August 2018, many debt funds have incurred heavy losses following credit defaults at high-profile companies such as IL&FS and DHFL groups. While it has been around a year since the defaults started, the AUM of open-ended debt schemes is yet to reach the AUM levels seen at the end of August 2018.
“Such instances do not reflect well on the industry practices. While SEBI stepped in and took several measures in the interest of the investors, the need for us to step in may not have arisen if many of these measures were taken by the industry itself,” he said.
He further explained to the official about the fault lines in AMCs investment decision by giving an example of liquid schemes. He said that the average holding in liquid instruments was less than 5% of AUM in 20% of the instances as compared to an average net redemption of around 19%.
Tyagi said, “A certain element of self-discipline by the industry could have averted such a situation.”
