In yet another upgrade to the regulatory framework of debt funds, SEBI has mandated these funds to keep at least 10 per cent of their net assets in liquid securities, such as cash, government securities, repo on government securities and T-bills. The regulation has excluded overnight, liquid, gilt and gilt funds with 10-year constant duration.
Liquidity has always been one of the key concerns. Its impact increased manifold during the COVID-19-induced lockdown. In fact, poor liquidity was one of the primary reasons (as cited by the AMC) behind the winding up of six Franklin schemes. Since the underlying bonds of these schemes were not much liquid, the AMC faced difficulty meeting heightened redemption pressures. From this perspective, the move appears to be a sound one, which will help mitigate some risk.
It is also noteworthy that, in mid-2020, amid the strained liquidity in the corporate bond markets, mutual fund companies sought SEBI's permission to make additional investments in treasury bills and government securities across corporate bond, banking and PSU, and credit-risk funds. Since debt mutual funds will now have exposure to such liquid assets as an in-built mandate, it will certainly help in enhancing the liquidity of their portfolios.
In the circular, SEBI has also mandated all open-ended debt funds (except overnight funds) to conduct stress testing. While the regulations related to liquid assets will be effective from February 1, 2021, those related to stress testing will be effective from December 1 2020.
SEBI has set up a committee to deliberate on these rules and according to the recommendation of the committee, the rules related to the allocation to liquid assets and stress testing may be modified.
