In the backdrop of the Securities and Exchange Board of India (Sebi)’s move to cap exposure of mutual funds (MFs) to additional Tier I and Tier II (AT1 and AT2) bonds to reduce portfolio risk in debt MF portfolios, a Crisil analysis of February 2021 MF portfolios shows that 36 schemes spread across 13 fund houses would breach the cap of 10% per scheme in securities.
Interestingly, none of the fund houses cross the threshold of 10% of such instruments at the asset management company (AMC) level. It was mainly the banking and public sector undertaking (PSU) fund category, which has the highest number of schemes at seven exceeding the 10% cap in such securities, according to the analysis. This is followed by the five credit risk funds, four medium duration funds, four medium to long duration funds and three dynamic bond fund categories that exceed the 10% cap, the analysis shows.
Piyush Gupta, director, Crisil Funds Research, said: “The regulator’s move to ‘grandfather’ limits previously held is a positive move. In the medium to long term, with the restrictions in place, it could reduce appetite among MFs for these securities, thus limiting the risk for investors.” He said this was prudent given that a lot of new individual investors are entering into debt funds.
Sebi’s move comes after write-offs hit investors. The circular on March 10, 2021, caps investments by a mutual fund house under all its schemes in bonds with special features (primarily AT1 and AT2) to not more than 10% from one issuer. It also specifies that no MF scheme can hold more than 10% of its net asset value (NAV) of its debt portfolio in such bonds, and not more than 5% of the NAV of the debt portfolio should be in such bonds from one issuer.
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