AMCs park liquid-plus funds into group firms

A few asset management companies (AMCs) are learnt to have transferred a slice of their holdings in liquid-plus schemes to the books of their group companies, to avoid potential losses that could arise from the stricter mark-to-market rule for debt securities that has become effective since August 1. The new rule requires fund houses to mark the prices of the securities with maturities of over 91 days, to market rates.

Liquid-plus schemes have a maturity of more than 91 days, while liquid schemes invest in debt instruments with maturity of less than 91 days.

By selling the bonds to the group company, the risk of volatility will be transferred to the books of the division buying those bonds. Closer to maturity, the transaction will be reversed.

“The transaction as such is not illegal, but a few months later, these funds will be going around bragging to potential investors that their schemes were the least volatile,” said an industry observer, adding that smaller fund houses will not be able to do such deals. “That is misleading the investors,” the person said.

Last week, fund houses had approached Sebi, requesting the regulator for an extension of the August 1 deadline for the new debt valuation norms. The general perception is that interest rates are likely to rise in the near term. When interest rates rise, bond prices fall, and this impacts the net asset value (NAV) of bond funds. Fund managers are worried that a decline in NAVs could spark off a vicious circle, as investors redeem their money, forcing fund managers to sell the bonds at a discount, which in turn causes the NAVs to decline further.

Roughly, a third of the Rs 6.72 lakh crore managed by the mutual fund industry is in liquid plus schemes. A liquid-plus scheme is more popular than liquid schemes, as they offer better returns and are taxed at a lower rate. A dividend distribution tax of 28.33% is charged on liquid funds while it is 22% for other debt schemes, including liquid plus schemes.

Such arrangements were common during the meltdown in money market mutual funds in late 2008, when mutual funds had heavily invested in the bonds of real estate companies. When the property market soured, real estate companies were unable to redeem their bonds. Many investors suffered a loss on their capital —something unusual for debt schemes — as the bonds had to be sold at a loss. Compounding the fund managers’ woes was the illiquid nature of bonds.

Faced with no buyers, many fund houses got their parent companies to buy out their unsaleable bond portfolios.

Some industry players feel a volatility rating, which is prevalent in international markets, could check such deals. That is because rating agencies that issue the grade, also conduct random checks on the portfolio to ensure that all rules are being adhered to.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/AMCs-park-liquid-plus-funds-into-group-firms/articleshow/6254317.cms

Debt fund NAVs fall as new norms set in

On the first day of change in valuation norms for debt schemes, 24% of such funds reported a fall in NAVs as compared to last Friday.

Long-term debt category funds, namely medium and short-term funds, took a beating while liquid plus schemes (barring two) saw a rise in NAV.

However, it is also quite likely the fall in NAV for these funds could have taken place for reasons other than valuation norms change.

Out of the 588 debt schemes, over 139 schemes saw dip in their NAV on August 2 compared to July 30. Since most funds don’t declare NAVs on Sundays, so July 30 figures were taken for the study. Market regulator Securities and Exchange Board of India (Sebi) had earlier mandated all fund houses to mark-to-market all debt securities with remaining maturity of over 91 days from August 1. Earlier, it was 182 days. And higher interest rate scenario in the economy seems to have hit some debt funds, which now have to mark-to-market instead of smoothening interest inflows through the method of amortisation.

Sebi had deferred the deadline for its implementation to August 1 from July 1, and interestingly, liquid plus schemes had seen huge redemption in June. Scuh schemes were structured few years back to benefit from the earlier valuation loophole.

With the new Sebi rule in place, most fund managers have been proactive in order to protect losses for existing investors. K. Ramakumar, head, fixed income at Sundaram BNP Paribas Mutual Fund said, “We had already started marking-to market the portfolio from July itself based on the new rule. He added Sundaram schemes did not fluctuate much. NAV of Sundaram BNP Paribas Income plus, which is a liquid plus scheme, rose a tad 0.02% on August 2.

The highest fall in NAV was seen in LIC Bond fund, a medium term debt fund by 2.97%.

Source: http://www.financialexpress.com/news/Debt-fund-NAVs-fall-as-new-norms-set-in/655700/