New debt norms: It's business as usual for MFs

A fortnight after the new debt valuation norms came into force, mutual fund players say their business is running as usual and there is no trend of money being pulled out from liquid plus schemes.

They said companies were also becoming less insecure about unpredictable returns due to volatility in net asset values (NAVs). Under the norms, implemented from August 1, debt securities with maturity up to 182 days should be valued on their weighted average market price rather than the earlier practice of valuation on an amortisation basis.

Liquid funds are open-ended short-term debt funds with a maturity of up to 91 days, whereas liquid plus funds have a maturity of over 91 days.

Returns of several liquid plus schemes have been affected a bit, but fund managers say that players who maintain these schemes in a conservative manner will manage. On August 2, when NAVs were first declared after the norms came into force, returns of a lot of funds declined to 4-4.5 per cent from 5.5 per cent.

After the Securities and Exchange Board of India (Sebi) circular on the norms, fund market experts were apprehensive that money would start flowing from liquid plus schemes to liquid schemes.

“Earlier, companies feared that if they have a long average maturity duration, they may end up with negative returns. However, we haven’t seen any fund giving negative returns so far, which is a comfort for the industry,” said the head of fixed income at a mid-sized fund house.

Institutional investors had also kept a watch on the volatility factor, said an independent industry expert. “Companies are going for funds whose returns have been less volatile, as that makes an exit call easy,” he added.

According to Amandeep Chopra, head (fixed income) at UTI Mutual Fund, “Initially, we saw corporates moving into liquid funds that were not marked to market. Now, they are coming back to liquid plus schemes. This will decide how this category grows.”

Returns from liquid plus funds are normally higher as they hold securities of a longer duration. Almost 40 per cent of assets under management of the fund industry are under liquid plus schemes. Liquid plus funds are favoured by companies and banks as they generate about 5.5 per cent returns annually, while liquid schemes and banks’ short-term fixed deposits give 4.25 per cent.