Liquid funds can hold 3-month papers only; FMPs can’t declare indicative returns & yields.
In a move that could dent popularity of debt schemes, the Securities and Exchange Board of India On Monday banned funds from suggesting indicative yields on debt plans and cut the maximum maturity of papers liquid funds can invest.
The summary of the two strongly-worded circulars is that fund houses will have to hold papers in liquid funds that mature within three months; the category of liquid-plus funds will have to be rechristened; and Fixed Maturity Plans (FMPs) can no longer declare indicative yields and indicative portfolios, a practice widely followed in the industry to sell FMPs.
| Mutual funds in Rs crore | |
| Category |
Dec 31, ‘08 |
Said A Balasubramanian, chief investment officer, Birla Sun Life Mutual Fund, “There are no surprises. These guidelines are in line with industry expectations.”
The Rs 91,979 crore liquid fund category, which are short-term debt funds, has to bring down the maturity of their papers from the existing one- year to six months (182 days) by February 1. And in the next three months, by May 1, they will be allowed to invest in only three-month papers (91 days).
| MOVE |
| Liquid funds to hold papers of only three months |
| Nomenclature for liquid-plus funds to be changed |
| No indicative returns and yields by FMPs |
| IMPACT |
| Will protect investors, if there is a run on any scheme |
| Yet another category will confuse investors |
| Will reduce the risk and pressure on fund managers |
Fund houses have an eight-month window to do inter-scheme transfers of securities having maturity of up to 365 days as on February 1. From November 1, they have to follow the 91-day guideline.
These proposals are in line with the recommendations of the Association of Mutual Funds of India’s (Amfi) recommendation in November, 2008. Amfi suggested that liquid funds should hold papers only up to 90 days.
Also, the nomenclature of the Rs 54,103 crore liquid-plus category, will have to be discontinued within the next 30 days. That is, fund houses can no longer have schemes called ‘liquid-plus. Instead, they will have to be called by some other name. Sebi’s circular states that calling schemes as liquid-plus gives an impression that there is added liquidity in schemes. Typically, fund houses launch these schemes where the underlying papers are of a longer maturity (more than one year). This improves the returns of the schemes.
However, the downside is that when investors pull out money, fund houses find themselves in deep trouble because of longer-tenure papers.
For instance, last October, Lotus Mutual Fund’s one liquid-plus scheme – Lotus India Liquid Plus (Institutional) lost Rs 1,430 crore (from Rs 2,094 crore to Rs 663 crore) in a single month. Since the average maturity of papers was 1.12 years, the fund house was in deep trouble. It was bought by Religare AEGON in the first week of November.
Parijat Agarwal, head (fixed income), SBI Mutual Fund, said that lessons have been learnt from the October-crisis. “These changes are in the right direction and good for the fund manager,” added Agarwal.
FMPs, which were the toast of the mutual fund industry not so-long ago, have been barred from giving indicative portfolios and returns. According to the Sebi circular, there is a general consensus that ‘this practice should be prohibited as the indicative portfolio and indicative yield may be misleading to the investors.’
Earlier in December, the market watchdog had issued guidelines that investors would not be able to exit FMPs by paying a load. Instead, they would be listed at the stock exchanges.
According to most fund experts assets of FMPs have already fallen in the last few months because of a number of reasons. Since September, when it came to light that indicative and real portfolios were different, investors started becoming cautious about them.
This was quickly followed by indicative rate cuts by the Reserve Bank of India. This, in turn, reduced the returns.
Finally, with the listing norm, FMPs have already become quite unattractive. The category’s assets stand at Rs 74, 994 crore, down Rs 22,459 crore in the last three months.
