Various steps have been proposed for controlling and lowering debt mutual funds risk in India by the Securities and Exchange Board of India (ESBI). The reforms are likely to make debt funds even more stable, which would in effect draw more creditors together. Consider the debt mutual funds regulations suggested by SEBI and the effect it can have on investors.
The mutual fund sector was scrutinized following a postponement of the reconsideration of fixed maturity plans (FMPs) in the last few months after looking at some mutual funds. The HDFC Mutual Fund and the Kotak Mutual Fund grieved and, after some companies in the Essel Group were unable to restructure their non-convertible debenture where they had invested, had to roll over or decrease redemption of their FMPs proportionally in April.
Liquid funds would have to commit at least 20% of the assets to stable sources such as currency, government securities, and treasury bills (T-bills). This not only increases debt funds liquidity, but it also lets creditors deal with redemption risk by maintaining high-performance securities during a financial downturn.
From 25% earlier, sectoral exposure is decreased to 20%. It not only reduces industry-based risk but also provides investors with diversified business investments.
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15% of acquisitions have historically been aimed at home financing firms. SEBI has however recommended rising sensitivity rates of HFC of 10 percent. The other 5% would be allocated for housing.
The risk associated with HFCs should be reduced as the economic housing market is strengthened. Investors profit from the distribution of funds for subsidized housing that is fairly risk-free.
In the future, the valuation of mutual funds should not be dependent on amortization. The market will be worth for all instruments of the debt fund. Although the Net Asset Value (NAV) of funds may be non-linear, the stock valuation may more closely represent the current market interest.
Such steps are meant to avoid cases like the one already encountered. Whilst mandated public securities investment will guarantee a minimum of liquidity, the reduced concentration of the sector will discipline funds and force them to diversify their risks. Some mutual funds also signed standstill agreements with companies in which the funds also invested in debt instruments. This is not a good trend and is counter to the wishes of the mutual fund holders. By banning funds to enter into such standstill deals, SEBI has done the right thing. Also, SEBI mandated the market-based evaluation of mutual fund assets to properly represent their investment values.
While the purpose of SEBI to tackle the threats within a financial environment is commendable, the regulator’s behavior may have an adverse impact – which needs to be controlled. Some of SEBI’s latest rules are to raise the exit load for short-term deposits in liquid funds such that unexpected demands for reimbursement are prevented. It can impede the influx of funds in the bond industry, which is still quite undeveloped in India relative to the rest of the globe. Though SEBI does a lovable job in disciplining markets and intermediaries, it is more important to question whether the regulator is capable of protecting investors in any way.