Capital market regulator Securities and Exchange Board of India (SEBI) is in discussion with mutual fund houses to review and implement valuation guidelines for corporate bonds, said SV Muralidhar Rao, Executive Director, SEBI.
“We are in discussion with stake holders and we have decided to review the (valuation of debt securities and money market instruments) norms. We will be implementing it in due course while giving the industry a reasonable time to adjust to the change,” said Rao.
He was addressing the 13th CII Mutual Summit 2018 held in Mumbai today.
The regulator will come out with a consultation paper soon and invite comments and feedback.
After that, it would issue guidelines on how mutual funds should value their underlying securities.
Rao said the market regulator is taking a closer look at two areas of the valuation norms. One, how to value debt securities that mature in less than 60 days and two, securities that have been downgraded to 'below investment grade'.
At present, debt securities that mature in less than 60 days are not marked to market. They are valued on an amortised basis, a method where daily interest is added to ensure the security's price goes up in a linear fashion.
Most liquid funds invest in scrips that mature in less than 60 days and therefore, do not result in volatility.
Rao said there was a need to review valuation norms in order to ensure that the interest of incoming, outgoing and existing investors is protected.
He added that short term and long term risk should be adequately highlighted by mutual funds so as to set the right expectations.
SEBI’s decision to review valuation norms is in the wake of the recent credit rating downgrade in Infrastructure Leasing & Financial Services Ltd (IL&FS) and some of its subsidiaries' debt scrips, different fund houses downgraded their affected schemes' NAVs by different margins. In some schemes, the value of the securities was written down by as much as 25-100 percent.
While he applauded the impressive growth in direct plans, he said there is enough scope for mutual funds to popularize direct plans.
“There is a strong case for AMFI and mutual funds to educate investors about direct plans through advertisements and promote them,” Rao said.
As on Nov 30 assets under management (AUM) through direct plans accounted for 44 percent of total industry AUM compared to 21 percent in March 2013.
The AUM of direct plan accounted for 22 percent of equity AUM.
Direct Plan offered under mutual fund schemes has a lower expense ratio than the Regular Plan, as there is no distributor/agent involved, and hence there is saving in terms of distribution cost/commissions paid out to the distributor/agent, which is added back to the returns of the scheme.
Hence, a Direct Plan has a separate net asset value, which is higher than the normal regular plan’s net asset value.
Rao pointed out another area of focus for SEBI as exchange-traded funds (ETFs) and index funds that are yet to gain traction among retail investors.
Explaining further with numbers Rao said “ETFs account for only 4 percent of total industry AUM. So I urge AMCs to promote ETFs.”
SEBI is also observing closely how effectively 2 basis points is utilised for investor education by asset management companies.
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