SEBI's Monday circular asking debt funds to pre-define maximum risks has been received well by the industry. MFDs, experts and MF officials expect the move to bring more transparency in management of debt funds.
"Investors can now evaluate both present and potential future risk of the fund through the combination of risk-o-meter and potential maximum risk matrix," said Mahendra Jajoo, CIO-Fixed Income, Mirae Asset MF.
The move is said to have plugged a major loophole in classification of debt funds.
Many in the industry believe the present categorisation of debt funds leave fund managers with a lot of leeway with respect to credit and interest rate risks. They said managers of even extremely safe sounding schemes like liquid funds and ultra-short term funds are free to take credit and interest rate risks.
"A lot of investors don't understand the risks in liquid funds and ultra-short term funds. They believe such funds are extremely safe. They don't understand that the fund manager can take credit risk in these funds as well," said Mumbai-based MFD Rushabh Desai.
This is set to change once the new directive comes into force in December.
"Now what will happen is that the fund manager will only move in the range that he or she decides," Desai said.
As far as interest risks are concerned, the leeway comes from the average maturity rule, which allows managers to invest in instruments with much higher interest rate risk than an investor would have normally expected.
"So far, as long as the average duration is maintained, individual debt instruments can be of any duration. This will change now. With the new circular, fund managers will have to maintain pre-defined maturity at individual security level," said Joydeep Sen, corporate trainer-debt.
Fund managers will still be free to take interest and credit risks but they would now have to inform investors beforehand. Investors will have the option to redeem their investments without paying any load in case the risk level goes up.
What do you think will be the impact of SEBI’s order? Let us know in the comments section below.
