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It seems that the fears of the Lehman Brothers collapse in 2009 still looms large over the Securities and Exchange Board of India’s (SEBI) minds. Ever since the event the SEBI has been uncomfortable with the valuation of debt instruments. For instance, Lotus Mutual Fund sold its business to Religare in November 2008 after it lost almost Rs 2,500 crore in its liquid and liquid-plus schemes in a single month. Keeping this in mind SEBI had (in July 2010) introduced Marked-To-Market guidelines for more than 91-day papers wherein the Asset Management Companies (AMCs) were directed to value the debt and money market instruments held by the debt funds at the market price and not on amortisation basis as was the case earlier.

Treading on the same path, the SEBI is now planning to further tighten the noose by imposing mark-to-market (MTM) requirements for instruments with a residual maturity period of 60 days and more. Eventually the idea behind such changes is to get all the instruments irrespective of their tenure and type to be quoted on market rates and the net asset value (NAV) calculated accordingly. Moreover, the RBI and SEBI have repeatedly expressed concerns about banks and corporates round-tripping investments (continuous and frequent purchase and sale of securities) using liquid funds. Fund houses have lost significant money in liquid funds since RBI capped banks’ investments in liquid funds at 10% of their net worth in May 2011.

  Park your short term money based on your time horizon

(Source: ACE MF, PersonalFN Research)

 

The reason for such policy initiative...
The MTM valuation of securities irrespective of their nature will help prevent systemic risk for mutual funds in case of heavy redemptions by institutional investors leading to winding up of their business (example cited above). Also, this move if implemented will make the mutual funds industry less dependent on institutional money but on the flipside, liquid funds and more so liquid plus schemes may lose appeal among the high-value investors as there will more volatility due to the price movements in short term papers.

 

Our view:

We believe that this proposal if implemented by the SEBI will have impact on mainly the liquid plus schemes holding papers of more than 60 days of maturity. Generally liquid funds may not face volatility unless the average maturity turns out to be greater than 60 days. However, if SEBI introduces a complete overhaul in the valuation of securities making them mark-to-market irrespective of their tenure may make liquid and liquid plus schemes unattractive to investors.

Hence, investors now should be careful while selecting the right debt mutual funds suiting their needs and investment time horizon. If all the securities irrespective of their tenure are made mark-to-market then the investors would be better off parking their short term surplus under savings bank account due to deregulation of savings bank account interest rates.

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yosemitensp@earthlink.net Feb 25, 2012 Dale, your cmemont is not only helpful to those reading bu, providing more energy to me. Such readers are adding happiness to me and energy to my time I spending for this blog... appreciated - Investinternals

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