SEBI issues new guidelines to make investments in debt mutual

funds more secure

A debacle, following IL&FC crisis last year, in the trusted segment of financial instruments, where
people even park their contingency funds, had put market regulator SEBI into a fire-fighting mode.

Although debt funds are considered safer than equity mutual funds as they don’t get affected by
daily fluctuations in the equity markets, but last year some debt funds, having a large exposure to
the NBFC sector, gave negative returns after the IL&FS crisis dragged the sector down. This triggered
a panic among the investors, resulting in further redemption pressure on the funds forcing the Asset
Management Companies (AMCs) sell the devalued bonds without giving time to recover and
resulting in further devaluation.

Such a debacle in a trusted segment of financial instruments, where people even park their
contingency funds, has put market regulator Securities and Exchange Board of India (SEBI) into a fire-
fighting mode.

After the IL&FS crisis hit the returns of debt funds, a blame game had started. Some had blamed
fund managers of AMCs and even demanded that the losses of investors should be compensated
from the profits earned by respective AMCs. But the fact is that the fund managers rely on rating
agencies, as they pick the bonds having good credit ratings.

What is really surprising that rating agencies like ICRA, a unit of Moody’s and Fitch-owned India
Ratings & Research and CARE didn’t raise red flag despite the IL&FS group’s debt burden jumped 44
per cent as early as in 2015.

Taking a note on deficiency in services by rating agencies, the SEBI Board, in its meeting on March 1,
2019, has made some proposals to bring uniformity and consistency across the mutual fund industry
on valuation of money market and debt securities rated below investment grade.

According to the proposals, the valuation agencies appointed by the Association of Mutual Funds in
India (AMFI) may provide valuation of money market and debt securities rated below investment
grade.

The market regulator, in its proposal, also said, “As Asset Management Companies are responsible
for fair valuation, they may deviate from the valuation provided by the valuation agencies subject to
recording of detailed rationale for such deviations, appropriate reporting to the Board of AMC and
Trustees and appropriate disclosures to investors.”

Apart from over exposure to a particular segment, changes in RBI policy rates and subsequent
impact on risk-free rates are also pose interest rate risk on debt funds having longer duration
financial papers in their investment portfolio. While reduction in prevailing interest rates increases
the value of funds having bonds with higher interest in the portfolio, a reverse situation may result
into fall in value of such funds.

To make the existing valuation practices more reflective of the realisable value of money market and
debt securities with residual maturity up to 60 days, the SEBI Board has decided that the residual
maturity limit for amortisation based valuation by mutual funds shall be reduced from existing 60
days to 30 days.

The SEBI Board has also decided that the threshold maintained between reference price and
valuation price shall be within the range of ±0.025 per cent. For this purpose, the reference price
shall be taken as security level price given by the valuation agencies.

Less dependency on rating agencies and own research before picking up financial instruments and
reduction in duration as well as transparency in valuation of financial papers would reduce the
associated risks and make the bond funds more secure.

Financial express
Published on March 1st 2019
Index funds’ outperformance over large-cap peers boosts their
appeal
Wealth managers are increasingly asking investors to allocate some portion of their portfolio to
passively-managed index funds instead of large-cap funds with several actively-managed large-cap
equity mutual fund schemes underperforming their benchmarks in last one year.

An actively-managed equity scheme is one in which the fund manager takes decisions about how to
invest the fund’s money. A passively-managed fund, by contrast, simply follows a market index, like
the Sensex or Nifty. Its fund manager does not take any active investment decision.

Over the last one year, index funds have outperformed actively-managed fund categories. Actively-
managed large-cap funds have lost 0.37 per cent, while the index funds mimicking the Nifty have
gained 3.87 per cent, as per data from Morningstar India.

Financial planners point out that after Sebi norm on categorisation and rationalisation of mutual
fund schemes, large-cap stocks are mandated to hold 80 per cent of their portfolio in top 100 stocks
by market capitalisation, making it difficult for them to generate alpha, prompting investors to look
at passive funds.

Earlier many such large-cap funds took exposure to mid- and small-cap stocks and generated alpha.

“We recommend index funds as an alternative to large-cap funds. Post categorisation, it is becoming
difficult for large-cap funds to generate alpha. Added to that index funds score due to their lower
expense ratio,” says Jitendra Solanki, founder of JS Financial Advisors.
Typically most actively-managed equity mutual funds charge expense ratio in the range of 1.5-2.5
per cent, while passively-managed equity funds could charge anywhere between 0.05 per cent and 1
per cent.

Wealth managers say given their simplicity and low cost, index funds are a good starting point for
first time investors, especially those moving to equities from fixed deposits.

In the last one year, Nifty returns have been concentrated and have come from a handful of stocks.
Stocks like Bajaj Finance, Tech MahindraNSE -2.04 %, Axis BankNSE 0.66 %, Hindustan UnileverNSE -
0.56 % and Reliance accounted for a bulk of the Nifty returns and hence actively-managed large-cap
funds lost out.

“Index funds are easy to understand and relate to. In a country where there are only two crore
mutual fund investors, they (index funds) will help increase penetration and get investors into the
country,” says Anil Ghelani, senior vice-president, DSP Mutual Fund.

Fund houses have increased their product offering in the passive space over the last couple of years.
Recently, DSP Mutual Fund launched DSP Nifty 50 Index Fund and DSP Nifty Next 50 Index Fund.
Aditya Birla fund house has launched a Nifty Next 50 ETF. SBI MF has launched a smart-beta ETF, a
hybrid between traditional passive and active strategies.

Economic times
Published on March 5th2019
AMFI seeks clarification on stamp duty tax in mutual funds
The trade body has requested SEBI and government to make necessary amendment to the existing
TER.

AMFI has sought clarification from the government on stamp duty tax to be levied on financial
products including mutual funds.

Earlier, in interim budget 2019, the Union Finance Ministry has announced that the government
would levy stamp duty on financial securities transactions, which includes financial instruments like
direct stocks and mutual funds.

An AMFI board member requesting anonymity told Cafemutual that AMFI has sought clarification on
who will bear the stamp duty tax on such transactions. “Currently, TER does not include stamp duty
tax. Hence, we have requested finance ministry and SEBI to make necessary changes to the TER
structure. Ideally, investors should bear stamp duty tax on mutual funds.”

Since mutual funds deal with shares, every time a fund manager executes transaction, the fund has
to pay stamp duty along with securities transaction tax. “Currently, the mutual funds fund industry
executes transaction of Rs.5 lakh crore each month in equity and debt markets. Hence, the impact of
stamp duty would be large. Also, the impact would be more on funds with high turnover ratio,” he
said.

He further said that while government is yet to announce the rate at which stamp duty will be levied
on demat transactions, it is understood that it would be 0.005%. This would be implemented from
April 1, 2019, he said.

Earlier, the government had waived off stamp duty in transaction of securities in demat form.
However, the government has proposed to re-introduce this duty. Also, stock exchanges will have to
track origin of investors to distribute stamp duty among states.

Café mutual
Published on March 4th 2019