In the wake of the earlier IL&FS and now the DHFL crisis wherein the later has defaulted on several debt payments, the SEBI in order to safe-guard the long term interest of debt fund investors has revised a slew of provisions in order to render them more secure.
Changes or key announcements made for debt fund investors and how it may likely impact investors:
1. All of the debt funds will be made mark-to-market: With this change NAVs will give the true picture of the fund performance as valuations of bond and money-market instruments will be based on mark to market instead of the earlier amortization method.
2. Liquid funds to invests a minimum of 20% of the funds in G-securities, cash and equivalents: With this these funds will be able to manage high-scale redemptions as well as the move will reduce returns from the fund.
3. Limit imposed in respect of exposure of funds to individual sectors, issuers, unlisted securities, structured instruments as well as loan against shares: The sectoral cap has been reduced from the current 25% of the AUM to 20%. Also, funds will not be allowed to invest over 10% of their assets in debt instruments with credit enhancement. Further, the overnight and liquid funds will not be allowed to invest in such securities at all.
There will be a lesser degree of harm in case of default by a single errant company and hence a better-quality diversified portfolio.
4. MFs to maintain 4 times of their investments in debt instruments with credit enhancements backed by equities, popularly known as loan against shares (LAS)
5. For redemption within 7 days, liquid funds will attract exit load: Exit load charges are levied when an investor exits a scheme and with this overnight funds will gain popularity among corporate investors.