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The Securities and Exchange Board of India (Sebi)’s latest guidelines in which it has reduced the exposure limits for debt mutual funds will reduce the risk for investors, say experts. “While the new changes reduce risk that investors face in a debt fund; the revised norms do not take away the credit risk a mutual fund faces due to the downgrades in the securities,” says Pankaj Sharma, executive vice-president, head of business development and risk management, at DSP BlackRock Investment Managers.
In other words, situations like Amtek Auto - in which investors got stuck because of the inability of the company to repay - can still happen. For investors, it still boils down to choosing a fund house that has a good track record and a team which can evaluate and take a long-term call on the debt papers, says Sharma.
Fund houses say things could get more complicated. Murthy Nagarajan, head of fixed income at Quantum Mutual Fund, feels the regulator should have focused on the quality of papers rather than limiting the exposure. “We wish the regulator had relaxed the restrictions for debt papers with the highest ratings,” says Nagarajan. He says fund houses will need to look at papers that are slightly risky to achieve the diversification Sebi has mandated. That’s because, at present, there are not enough high-quality papers (AAA+ rated) that exist in the market. “If you look at banks, there are only three banks that are rated AAA+,” he notes.
Vidya Bala, head of mutual fund research at Fundsindia.com, says the new norms help reduce risk in other aspects. According to the new norms, a mutual fund scheme cannot hold more than 10 per cent of its assets in a single company. The earlier limit was 15 per cent. The limits for exposure to a sector have been brought down from 30 per cent to 25 per cent. The market watchdog has introduced group-level limits for debt schemes.
Sebi said the ceiling on fixed income investments at the group level of the issuer companies will be fixed at 20 per cent of the net asset value of a scheme. Bala says the restriction at group level would help investors, because many debt funds have exposure to multiple companies from the same corporate group.
An official with a prominent fund house say the restricting exposure to a single company will help those investors who have opted for credit accrual and credit opportunities funds. To give a higher yield, these schemes have been heavily investing largely in companies with lower credit rating, but giving higher yields. With new norms kicking in, they will need to adjust the portfolio accordingly.
When the rating of Amtek Auto was downgraded, JPMorgan Asset Management had also restricted the withdrawal from its two debt schemes that held the papers of the auto company, making the investment illiquid. But, Sebi has not changed this practice. Sharma of DSP BlackRock says it’s a practice that benefits the investors. In case of such an event, well-informed investors would immediately redeem their units, forcing the mutual fund to sell high quality papers. Investors who are late for redemption will be stuck with bad-quality papers.
