The recent regulatory changes by the Securities and Exchange Board of India (SEBI) for valuation of debt securities could lead to more churn in liquid funds that already saw outflow of ₹1.5 lakh crore in June thereby dragging the overall assets in mutual fund (MF) industry.
According to the latest study by ICRA, institutional entities, who are the biggest investors in this segment, might look at other categories while those with a high-risk appetite might look at rebalancing their portfolios to higher-yield, higher-risk categories such as ultra-short and money market funds.
“The category [liquid funds] might see more churn going forward due to the recent regulatory amendments announced by the SEBI for debt-oriented schemes, which has made valuation of debt securities to be fully mark-to-market (MTM) compared with amortisation of securities with maturity less than 30 days,” ICRA said.
The change in the threshold level for amortisation from 60 days to 30 days will have an impact on both returns and volatility of liquid funds. Incidentally, the SEBI had only recently introduced the 30-day norm since till June, the threshold was 60 days, it added. According to the monthly numbers from the Association of Mutual Funds in India, net outflows from income and debt oriented schemes totalling ₹1.71 lakh crore in June led to a decline in the MF assets under management to ₹24.25 lakh crore.
“Outflows from liquid funds were primarily the seasonal outflows seen by the category in a quarter-end month such as June, as institutions such as banks and corporates redeem their investments to pay for quarterly advance taxes,” said ICRA. The funds are typically invested back into liquid schemes once the quarter-end accounting and mandatory payment requirements have been met, it added.
At its recently-held board meeting, the capital markets regulator also introduced a graded exit load on investors of liquid schemes who pull out prior to seven days.
