Approval of liquidity standards for debt mutual funds by SEBI

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(Commercial Representative) MUMBAI: The Securities and Exchange Board of India (SEBI), the regulator of the capital market, has issued guidelines for calculating mandatory liquid holdings in debt mutual funds. In November 2020, SEBI had said that debt mutual funds would have to invest at least 10 per cent of their assets in liquid papers such as cash, treasury bills, government securities (G-Sec) and repurchase agreements or repo.

According to SEBI, Macaulay will not have to exclude the liquidity stake in the calculation of the limit on duration, riskometer, and the issuer will have to exclude the mandatory liquid stake for asset allocation rules in addition to group and sector exposure.

For example, corporate bond funds are required to invest 50% of their assets in debt with double A plus and higher ratings. According to SEBI, this accounts for 40 per cent of the non-liquid portion of the portfolio, resulting in 3 per cent of the overall portfolio. SEBI has also appointed a committee for liquidity as well as stress testing framework for debt mutual funds.

Based on the panel's recommendation, SEBI has asked the Association of Mutual Funds in India (AMFI) to bring in a liquidity risk management framework within a month. Once this framework is ready, all mutual funds will have to adopt it. The new SEBI Circular will come into effect from December 1, 2021.

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