Friday , July 30 2021

SEBI intends to make safer combined money safer to investors but also limits relief

Sebi is committed to introducing new hard rules to protect investors in liquid funds, the most fundamental offer in the consolidated pool basket, of credit risk.

Return over security

Liquid money allows investors to park money for a short period, ensuring easy liquidity and high security. Investors can re-use their money on the next business day (T + 1). Liquid money also offers an immediate redemption of up to £ 50,000 a day. The security aspect is derived from the location of liquid funds in very short tenure bonds, which are not affected by wider bond market variations. These funds can only invest in instruments with a maturity of up to 91 days. This ensures that the fund managers do not carry unnecessary interest rate risks. The money sits at the bottom of the risk graph for bond funds – overnight money offers safer offers investors similar to a fixed bank deposit. Although liquid institutions are tapped by most liquid funds, financial planners advise individuals to park their remainder in cash so that dormant money can earn more than what they would get from a savings account.

However, the rules are silent about the amount of credit risk these reservoirs could take. Fund managers can use their discretion to invest in advanced product instruments from publishers whose ability to repay is not robust. Although most mainstream housing has avoided taking any bust in credit risk, some money has been taking exposure to lower credit quality instruments to boost returns, compromising on security.

Default by publishers has resulted in a steady reduction in taxation reserves


Source: Ace MF

Introduce security measures

Reports say that the regulator aims to make fluid money safer by introducing difficult measures. Now the reserves may now have to identify easily to market all the instruments that mature 30 days or more. At present, the money does not have to mark market guarantees that mature under 60 days. The value of these bonds is based on prices provided by grading agencies. Market marking means that the fund must value the bonds in the portfolio at the current market price.

"Improving MTM requirements will become transparent as the NAV accurately reflects the value of the basic portfolio," said Kaustubh Belapurkar, Director, Research Fund, Morningstar Investment Advisory. A compulsory closing period may also be introduced, to prevent instability by keeping a check on repayments. However, this will not benefit investors, feel Vidya Bala, Head, Mutual Fund Research, FundsIndia. "The imposition of leakage restrictions impedes the purpose of liquid funds," he said. She suggests withdrawing from inconsistencies in credit rates to prevent poor quality papers from finding liquid money.

Earlier, instruments released by troubled companies such as Amtek Auto, Jindal Steel and Power, and IL & FS and subsidiary companies were found in the portfolios of liquid money. The presumption from these publishers led to a fall in the NAVs from these reservoirs. In the IL & FS episode, some funds lost around 3-5% in one day, eliminating the value of half a year of earnings. He wrote a lot of IL & FS exposure plans completely, making the NAV tightening to that extent. The money has faced heavy redistributions due to the default. This lack of stability is causing concern and needs to be addressed, says experts. R Sivakumar, Head of Standing Income, Mutual Axis Fund says that credit risk needs to be more resilient at credit risk. "Liquid money investors expect a high level of safety and liquidity, they do not care for a higher product," he said. Arvind Chari, Head of Standing Income, Quantum Advisers said, "Liquid money in the last few years has not met two security and liquidity objectives. Investors deserve liquid funds with no credit risk."

Regardless of the changes, investors should stay away from the bad eggs in the basket that do not invest in accordance with the risk profile these reservoirs represent.

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