Debt funds are now more secured with new regulation

Do you have reservations about investing in debt funds? Debt funds are now more secure.

The debt market has been quite volatile over the previous few months. Many investors considered debt mutual funds to be riskier than equity mutual funds. All of this began with the IL&FS debacle in September 2018, when group companies defaulted on payments. Many mutual fund companies had made investments in these businesses. The Essel Group and additional episodes like it followed. In short, debt fund investors who had invested in liquid funds and other debt funds with the belief that debt funds are absolutely safe had had a wild trip.

The Securities and Exchange Board of India (SEBI) has issued guidelines to control debt funds in order to protect the interests of mutual fund investors.

The following are some of the adjustments proposed by SEBI: Infographics.

Liquid funds must invest at least 20% of their assets in liquid assets.

The goal of this measure is to improve the liquidity of liquid money. Mutual funds are required to retain 20% of their assets in liquid and safe assets such cash, government securities, Treasury bills, and repo instruments. It will ensure that fund houses can handle large-scale redemption requests without negatively impacting the liquid funds’ unit price (net asset value).

Maximum exposure to a single sector:

Liquid funds will no longer be allowed to invest more than 20% of their assets in one area. The previous restriction was set at 25%. This is done to mitigate the hazards associated with a single industry. Furthermore, liquid funds’ exposure to home financing businesses cannot exceed 10%, down from 15% previously. This is in addition to the 20% limit for each sector.

Withdrawing before the seven-day deadline incurs a penalty:

Because liquid funds have no exit loads, many major investors used to redeem their shares within a day or two. The subject of liquid fund stability arose because institutional investors such as institutions own the majority of liquid funds compared to regular investors. Mutual funds can now levy a graduated exit load on investors who withdraw before the seven-day mark. Investors who redeem after a day must pay a larger exit load than those who redeem later, say on the sixth day.

ALL papers will be valued using the mark-to-market method:

Securities with a maturity of more than 30 days must henceforth be marked to market, i.e., on a mark-to-market basis. Securities that matured after 60 days were previously required to be marked-to-market. NAVs of liquid funds will now reflect a true value of the fund as a result of this new development. However, the pace of variation in NAV is also anticipated to increase.

Debt funds are only allowed to invest in listed NCDs and CPs:

Many businesses use private placements to raise nonconvertible debentures (corporate bonds) and commercial papers. Funds can now only invest in publicly traded securities, with no private placements permitted. Since a result, the quality of the papers will be more transparent, as listed securities must follow the requirements and disclose as required.

Lending restrictions:

Mutual funds can now only lend to corporations in exchange for pledged equity shares with a four-fold cover ratio. Simply put, if a mutual fund borrows a group business Rs. 100, the group company must commit Rs. 400 in shares to the same fund. If the stock price drops, the corporation will have to compensate the fund by paying cash. If that does not happen, the fund house can sell the shares to recoup the funds and protect itself from a further drop in the borrower’s stock price. With this new law in place, fund companies will be forced to sell pledged shares in order to recoup money from promoters if the company’s share price falls.

SEBI took a number of important initiatives to make debt funds safer for investors like you and me. So, forget about your anxieties and begin investing in debt funds. Understanding debt funds can be difficult, which is where a mutual fund advisor can help. He will be able to properly guide you and answer any of your questions about debt money.

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