36 MF debt fund schemes exceeded riskier-bonds cap
Crisil said overall mutual fund portfolios of AMCs were not in violation of the 10% threshold in such bonds
MUMBAI : n February, as many as 36 debt fund schemes of 13 fund houses were above Securities and Exchange Board of India’s (Sebi’s) new cap on mutual fund holdings in AT1 and AT2 bonds, data compiled by rating agency Crisil showed.
However, Crisil said overall mutual fund portfolios of asset management companies were not in violation of the 10% threshold in such bonds. The Crisil analysis found that seven banking and public sector undertaking funds led the pack which exceeded the 10% cap in such bonds, followed by credit risk funds (5), medium duration funds (4), medium- to long-duration funds (4), and dynamic bond funds (3).
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“The regulator’s move to ‘grandfather’ limits previously held is a positive move. In the medium to long term, with the restrictions in place, it could reduce appetite among MFs for these securities, thus limiting the risk for investors. This is also prudent given the advent of hordes of individual investors into debt funds. They may not have the ability to understand MF portfolios and gauge the risks, especially in such type of bonds, we saw how they were caught unawares by the recent write-offs," Piyush Gupta, director, Crisil Funds Research, said.
In a circular on 10 March, Sebi capped investments by a mutual fund house under all its schemes in bonds with special features (AT1 and AT2) to not more than 10% from one issuer. It also specified that no MF scheme can hold more than 10% of its net asset value (NAV) of the debt portfolio in such bonds, and not more than 5% of the NAV of the debt portfolio should be due to such bonds from one issuer.
Sebi had also directed MFs to value perpetual bonds (AT1) based on 100-year maturity, shifting from the existing methodology wherein the call option date of a bond was considered for calculations. “This could cause volatility in pricing, especially of securities trading at a discount. It could also impact the portfolio maturity/duration...and cause volatility in categorization of schemes within the specific maturity dates," said Crisil. It said the move to limit exposure to such securities reduces risk for investors, but they must keep monitoring portfolios regularly and invest as per their risk-return profiles to meet financial goals.
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