Describing the Sebi move to cap
the exposure of mutual funds to tier 1 & 2 bonds to 10 per cent to mitigate
the risks for retail investors as a positive step, a Crisil analysis has found
that none of the AMCs is exposed to the risk though 36 schemes, mostly led by
banking and PSU funds, do breach the new threshold. Additional tier 1 bonds are
perpetual debt instruments that cannot be redeemed at the option of the holder
and carry fixed coupon. They are issued by banks which do not have a maturity
date and are, hence, called perpetuals but have higher risks. On the other
hand, additional tier 2 bonds are one-two notches above AT 1 bonds of a bank
and therefore have high loss-absorption features. The Reserve Bank had opened
up these bonds for retail investors about six years ago, with certain
conditions that ensured investors were well educated of the 'loss-absorbency'
risk of these bonds. The relatively lower risk in tier 2 bonds compared to tier
1 bonds is reflected in the ratings. Mutual funds value these bonds as if they
are maturing on their call date—the date on which the issuer may call back
bonds and repay their holders, but there is no compulsion on the issuer to do
so. Amidst the ongoing Franklin Templeton fiasco, the markets watchdog Sebi had
on March 10, asked mutual funds to restrict their exposure to additional tier I
& 2 (AT1 & AT2) bonds to under 10 per cent to reduce their risks in
debt fund portfolios, in its bid to mitigate risks of retail investors. The
regulatory move came after the huge write-offs hit investors in such bonds
issued by two banks in the past year. The regulatory move came after the huge
write-offs hit investors in such bonds issued by two banks in the past year.
“Our analysis of February 2021
MF portfolios shows that none of the fund houses cross the threshold of 10 per
cent of such instruments at the asset management company (AMC) level. However,
36 schemes spread across 13 fund houses breach the cap of 10 per cent per
scheme in securities,” Crisil said in a note on Sunday. But the agency said the
Sebi move will mitigate risk in debt portfolios for retail investors. The Sebi
circular has also specified that no MF scheme can hold more than 10 per cent of
its net asset value (NAV) of its debt portfolio in such bonds, and not more
than 5 per cent of the NAV of the debt portfolio should be due to such bonds
from one issuer. Crisil said its analysis has also found that banking and
public sector undertaking (PSU) fund categories has the highest number of
schemes (seven) exceeding the 10 per cent cap in such securities. It is
followed by the credit risk funds (five), medium duration funds (four), medium
to long duration funds (four), and dynamic bond funds (three), Crisil said.
Accroding to Piyush Gupta, a director at the agency, the regulatory move to
'grandfather' limits previously held is a positive move. In the medium to
long-term, with the caps in place, it can reduce the MFs' appetite for these
securities, thus limiting the risk for investors. This is also prudent given
the advent of influx of individual investors in to debt funds. They may not
have the ability to understand MF portfolios and gauge risk, especially in such
type of bonds, we saw how they were caught unaware by the recent write-offs,”
he said. In a radical shift from the current methodology where the call option
date of the bond was considered for calculation, the regulator has also
directed MFs to value perpetual bonds (AT1) based on a 100-year maturity. Gupta
said this may create volatility in pricing, especially of securities trading at
a discount. It can also impact the portfolio maturity/duration considering the
change of maturity date of securities to 100 years, and cause volatility in the
categorisation of schemes within the specific maturity dates. Considering the
massive impact it can have, the finance ministry had asked Sebi to withdraw the
guidelines related to the change in valuation norms. But from an investor's
perspective, the latest move to cap the exposure to these types of securities
reduces the portfolio risk.
No AMC has over 10% exposure to
debt funds: Crisil
Economic Times, 15th March 2021.
website - http://www.ryps.in/
No comments:
Post a Comment