In a bid to reduce concentration risk for mutual funds, the Securities and Exchange Board of India (Sebi) On Monday said that funds’ exposure to money market instruments of an issuer will be capped at 30 per cent of its net assets. Schemes can, however, continue to invest up to 15 per cent or 20 per cent of net assets, as the case may be, in other investment grade debt instruments of an issuer.
“These limits will not cover investments in government securities, T-Bills and Collateralised Borrowing and Lending Obligations (CBLO),” the market regulator said.
A large number of schemes, including FMPs, had invested heavily in debt instruments of a single company. Such kind of exposure to the money market instrument of a single issuer made these schemes risky for investors in the event of a default. According to a Crisil report, nearly one-third of fixed income funds have parked more than one fourthof their assets in one company.
Huge exposure to a single company leads to non-diversified portfolio. The report further said that 38 per cent of the debt schemes have significant exposure to the NBFC sector.
While the mutual fund industry has applauded the move, there are still a number of schemes that have invested a sizeable portion of their net assets in a single company. For example, Birla Sunlife FTP series AL retail plan has invested 24.73 per cent in Wockhardt. Similarly, HDFC's 18M Jan2008 retail FMP has put in 23.36 per cent of its net assets in Tata Motors.
Parijat Agrwal, head of fixed income at SBI Mutual Fund, said, “This is a step in the right direction for mitigating risk. Mutual fund portfolios will now become more structured.”
However, experts say that even the 30 per cent limit is very high as funds can invest 15-20 per cent in debt instruments of an issuer, which will take the total exposure to 45-50 per cent.