SEBI has given some leeway to debt fund managers.
In its latest circular, SEBI has said that in medium and medium to long duration funds, fund managers can reduce the portfolio duration up to one year, in case they have a view on interest rate movements in light of anticipated adverse situation. AMCs will be required to mention the asset allocation under such adverse situation in offer documents.
Further, the circular clarified that corporate bond funds can invest in AA+ and above rated instruments while credit risk funds will be permitted to invest in AA and below rated instruments (excluding AA+ rated instruments).
SEBI has clarified that while defining the type of scheme in duration funds, the Macaulay duration will be at portfolio level. AMCs will have to explain the definition of this concept in their offer documents.
In addition to investing in debt instruments of public sector undertakings and public financial institutions, SEBI has now permitted banking and PSU funds to invest in municipal bonds. Further, floater funds can now invest in fixed rate instruments converted to floating rate exposures using swaps/derivatives.
Fund houses are required to submit their proposals to SEBI by December 15.
Debt fund managers welcomed SEBI’s move. “Bond markets are volatile and the primary objective of fixed income investors is capital preservation. Had SEBI not given this flexibility, investors would have been wary. SEBI has acknowledged industry’s representation and has given us some flexibility in managing funds. Also, we now have a new instrument (municipal bonds) to invest in which will provide diversification,” said Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra AMC.
For equity funds, SEBI has allowed fund houses to consider average full market capitalization of the previous six month of the stocks. We believe that moving the stock market cap classification to “full market cap” instead of the commonly used “free float market cap”, will result in changing the market cap classification of several stocks, like PSUs as well as stocks with low free float, this may require higher levels of realignment in existing fund portfolios. Since the current set of benchmarks are on a free float market cap basis, this will also result in funds carrying higher active share and result in higher deviation from benchmarks in performance.
For instance, as per current market cap numbers, 15 stocks from the BSE 100 will be classified as mid cap stocks as per this definition. Many of these stocks are held by managers in their large-cap funds. While they still have the 20% non-large cap exposure option, it does limit them in taking additional non-large cap exposure.
The circular is silent on some of the other representations made by the industry in terms of providing flexibility in the universe of market capitalization which restricts the choice of stocks for equity funds. For instance, mid cap funds can invest only in 101st -250th company in terms of full market capitalization.
Industry experts believe that the number of funds would go down as many smaller and non-performing funds would be either merged with bigger funds or closed down. Morningstar conducted an analysis of the existing open-ended funds. Of the 800+ open ended funds, we expect the number of funds post realignment to be in the ballpark of 700, which is a 10-15% reduction in the number of schemes. The bigger asset managers will be the most affected, especially those who have had bought out or taken over schemes of other AMCs which resulted in the number of schemes bloating.
