Volatility, redemptions from schemes hit mutual fund NFO proposals

SEBI plans to impose an additional charge on redemptions of debt funds in stressed schemes. #sebi

Volatility, redemptions from schemes hit mutual fund NFO proposals Photo

The Securities and Exchange Board of India (SEBI) is planning to impose an additional charge on the redemption of debt funds in stressed schemes to ensure sufficient liquidity to meet redemption stress.

This comes in a few months after Franklin Templeton closed its debt funds, citing redemption pressures and lack of liquidity in the bond markets. The closure led to assets under management for these schemes decline by about half.

"The regulator is also working on dissuading excessive redemptions by imposing an additional charge on redemptions in stressed schemes, and install[ing] a mechanism where asset managers could take up the illiquid paper on their books,” a SEBI official said, according to Mint.

The official also pointed out a structural and fundamental issue in the secondary market. He said, "It’s an open secret that beyond the top-rated paper, the secondary market is fairly illiquid. As against banks, mutual funds who subscribe to these bonds have to disclose daily NAVs and provide liquidity even if the underlying paper is illiquid. This is a structural and fundamental issue; as long as new investors are added, these issues can be managed, but in the face of heavy redemptions, this becomes a tough task to manage."

SEBI was set up in 1988 as an administrative body, but has evolved and incorporated various regulatory changes as the need arises. Since May, the regulator has made several changes to avoid situations like the Franklin Templeton issue do not arise. Last week, based on the recommendations of the Mutual Fund Advisory Committee (MFAC), it added a "very high" risk category for mutual funds to warn investors.

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