In order to improve disclosure standards and increase transparency, AMFI has issued a best practices circular in which it has asked AMCs to follow uniform disclosure norms in their monthly factsheets.
AMFI said that it has received suggestion that duration and average maturity in debt schemes should be disclosed separately in factsheets for better clarity and disclosure. While some fund houses have been disclosing macaulay duration, modified duration, average maturity and yield to maturity separately in the monthly factsheets, a few fund houses are not disclosing macaulay duration.
Macaulay duration is the time taken to recover the real cost of a bond measured in terms of years by calculating the present value of future cash flows (interest and principal). It generally applies to investments where returns are fixed.
On the other hand, modified duration is a measure of the percentage change in a bond price in relation to a 100 basis change in interest rates. Simply put, modified duration indicates how sensitive a fund is to the changes in interest rate. The higher the modified duration, the higher the interest rate sensitivity.
Average maturity refers to the weighted average of all the current maturities of the debt securities held in the portfolio.
Yield to Maturity (YTM) helps you get a general idea of expected returns from the scheme over a time horizon closer to the average maturity of the portfolio. The YTM assumes that the securities will be held till maturity. This ratio is relevant in case of short to medium duration schemes, which aim to generate returns mainly through interest payments from invested securities.
Now let us look at key changes in the fund factsheets:
- AMCs will have to disclose macaulay duration, modified duration, average maturity and yield to maturity separately
- AMCs will have to disclose average maturity for Pass Through Certificates (PTCs)
- For all other debt securities, AMCs will have disclose maturity based on valuation provided by security valuation agencies
- AMCs will have to disclose their exposure to perpetual bonds, AT1 bonds and Tier II bonds clearly indicated against the name of bond under Basel II or Basel III
- For floating rate bonds, the maturity should be the contracted maturity while computing maturity
- For interest rate risk purposes, the duration could be computed based on the next interest reset date
- For bonds which have intermediate redemption structure, the maturity to be computed based on the weighted average maturity
AMCs will have to incorporate these changes in August month’s factsheet.
