Will you get safer debt funds with SEBI’s new measures?

You are well aware of the problems debt funds have been facing in recent times. I won’t be surprised if you say that you don’t trust debt funds anymore. In fact, I would agree.

There are pros and cons to all investments. Debt funds are no exception. Over time, SEBI has introduced various measures to ensure that the investment vehicle continues to inspire confidence in the investor.

In 2017-2018, the debt funds were categorised in a way that they could help most investors understand what they were getting into. In 2019, in the wake of the credit events that affected several debt funds, SEBI has announced a spate of measures specially with respect to liquid funds.

As SEBI puts it in the June 2019 circular, “…take necessary steps to safeguard the interest of investors and maintain the orderliness and robustness of Mutual Funds.”

In short, safer debt funds. I will summarise the measures here.

1. Liquid funds are required to now keep at least 20% of the AUM in liquid assets such as Cash, Government Securities, T-Bills, Repo instruments. This will ensure that if there is a sudden redemption pressure, the funds can meet it.
2. The limit on investment in any one sector is now revised to 20% from 25% earlier. Limits on exposure to Housing Finance companies has been reduced too.
3. Valuation of debt and money market instruments will now be completely mark to market. What does it mean? Hitherto, if you have noticed, you used to see a 0.02% daily increase in your liquid or ultra short term fund. That was the amortisation method where the gains were added to the portfolio consistently over time. In case of mark to market, the instruments will reflect the current market value. So expect to see a different increase/decrease in your funds.
4. Liquid and overnight schemes will not be allowed to invest in debt having structured obligations or credit enhancements. The other debt funds will now limit this exposure to 10% of the AUM.
5. There will be an exit load if you plan to redeem a liquid fund within 7 days. (So, if you are looking for a shorter period, money market / overnight funds is your answer)
6. Group exposure by a scheme is now limited to 5%. So, an ILFS or Essel, is expected to have a lesser impact.
7. The security cover for Loan against Promoter shares will have to be 4 times.

Hopefully, these will take care of the issues that debt funds suffered from and ensure that they continue to offer a diversified investment alternative.

Having said that, there is no cure to the investors taking blind decisions and chasing superior returns with no understanding of risk. As an investor, it is your responsibility to know what you are getting into.