It is no longer business as usual in debt mutual funds that have a staggering Rs 3,40,000 crore corpus as on date. In the last 15 days, they have faced redemptions of an unprecedented Rs 30,000 crore given the tight liquidity conditions. A leading fund house promoted by a giant European bank has actually capped redemptions beyond Rs 1 lakh in one of its fixed maturity plans (FMP).

Of the Rs 3,40,000 crore in debt funds, FMPs floated by fund houses account for over Rs 1,00,000 crore. The FMPs indicate 11.5-12 per cent returns to investors, which coupled with the tax advantage they offer, promise to be much better than bank fixed deposits. The moneys are invested largely in certificate of deposits issued by banks, NBFCs and even in debt issuances of firms across sectors including real estate.

And unfortunately, the capital market regulator, the Securities and Exchange Board of India (Sebi) does not require MFs to compulsorily disclose their investment portfolio. Given that there is hardly any depth in India’s corporate debt market, a significant quantum of the debt held by such FMPs are illiquid.

“The problem lies here. When there are large-scale redemptions, the MF first sells debt securities that are liquid. So, investors who stay on with the scheme are saddled with illiquid paper,” says Dhirendra Kumar, managing director, ValueResearch, a firm that tracks mutual funds.

In fact, to counter this problem, Sebi on Saturday changed the formula based on which mutual funds value their bond investments. “Because of the tight liquidity conditions, spreads have widened. The change in the discretionary spread now allowed by Sebi will make MFs show a net asset value that is correct, and based on the market valuation,” says Roopa Kudwa, Managing Director and CEO, Crisil. MFs value their bond investments based on a daily value matrix Crisil provides.

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