Till today, investors have considered debt funds to be a proxy to traditional investment options. However, particular market developments which also include corporate defaults, hurt investors’ confidence and trust on mutual fund investments. Last few years have not been easy on investors investing in income funds. To encourage and retain the trust of these investors, the market regulators – SEBI (Securities and Exchange Board of America) has made several changes in favour of debt mutual funds. This article will cover the top three changes that have favoured debt mutual funds in the past few years. Let’ understand these rules:
Segregation of investment portfolio – In the case of a credit downgrade, the downgraded security usually becomes illiquid, which makes it quite difficult for fund managers to dispose of these securities. SEBI has allowed segregation of debt securities in case of a credit event in 2018.In August 2020, SEBI has further allowed mutual funds to side pocket debt if borrowers approach the fund house or the AMC (asset management company) for debt reconstructing due to stress of the COVID-19 situation. This helps to prevent investors from investing in toxic securities.
Portfolio and return disclosure norms:According to the recent partial modification of a SEBI circular stated ‘Monthly portfolio disclosures’, the market regulator has mandated mutual funds to disclose their schemes’ portfolio every 15 days instead of 30 days. SEBI further stated to reveal the yield of the instruments in the circular as well.
The disclosure of returns of each security in the current portfolio will help investors to understand the quality of the portfolio and comprehend the risk level taken by the mutual fund scheme to a better extent.
Safer liquid mutual funds: To improve the risk management and ensure sufficient liquidity, SEBI has also mandated liquid funds to hold at least 20% of their corpus in liquid assets such as government securities, T-bills, cash, and repo in government securities round-the-clock. This step was undertaken after a few liquid mutual funds witnessed a steep fall in their single-day NAVs (net asset value) due to the credit crisis.
SEBI has also notified exit load on liquid funds for redemptions within a span of seven days to deter companies from using liquid funds to park their money for ultra-short periods. This is done as massive purchases, and redemptions from companies can amplify the risk in these funds for retail investors.
The benefits of mutual funds are innumerable. Make sure you are aware ofhow to invest in mutual funds. If you are skeptical, you can always take the professional help of mutual fund experts or advisors. Remember, your mutual fund investments should be in line with your investment portfolio. Investments should be customized to an investor’s financial objectives and goals, risk appetite, and investment horizon. Happy investing!
Byron Simpson is a qualified business/finance writer expert in investment, debt, credit cards, Passive income, financial updates. He advises in his blog finance cent.