Sebi circular stokes redemption concerns at mutual funds

The proposed rule on treating maturity period of perpetual bonds as 100 years has put investors in a bind. Fearing losses, some investors are considering redeeming their mutual fund units before the Sebi’s circular pertaining to perpetual bonds takes effect on April 1.

However, fund managers are advising investors — especially high networth individuals (HNIs) — to wait for more clarity from the regulator and not redeem their investments in a haste.

“We recommend investors not to just pull out the money from debt schemes only because of the valuation norms. After the letter by the Ministry of Finance to the regulator we hope some solution would be arrived soon,” said a head of fixed income from a leading fund house.

A large part of MF exposure to perpetual bonds is through debt scheme categories such as short term, medium term, banking & PSU funds and credit risk funds.

MFs hold nearly a fifth of AT-1 and Tier-II bonds issued by banks, which amounts to about Rs 3.5 trillion, according to an estimate by Nomura.

Following the March 10 circular, MF industry players had anticipated sharp redemptions from HNI investors. However, the letter from the finance ministry has raised hopes of some relaxation from Sebi before the implementation deadline.

An analysis of data provided by industry body Association of Mutual Funds in India (AMFI) doesn’t indicate any heavy redemptions as yet.

The daily assets under management (AUM) of medium duration funds as on March 15 stood at Rs 30,020 crore, down marginally from Rs 30,076 crore on March 12. Similarly, the AUM of credit risk funds has fallen to Rs 28,006 crore from Rs 27,988 for the period under consideration. Short duration funds have seen daily AUM fall by Rs 677 crore between March 12 and March 15.

“I don’t think investors should react hastily, we have been asking clients to stay invested because we are certain that regulators might come out with more practical solutions. I don’t think the valuation norm will remain in the same form after the letter from the Finance Ministry,” said a Mumbai-based distributor on condition of anonymity.

Typically, debt MFs report huge outflows during March as corporates redeem some of their investments to pay advance taxes or for other balance sheet requirements.

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