SEBI to impose cap on investments made in sectors in debt funds

Many FMPs had invested around 80% of investments in a particular sector and a single issuer

July 19, 2012 3:47 IST | India Infoline News Service
The Securities and Exchange Board of India (SEBI) plans to introduce restrictions on the extent of investments a mutual fund debt scheme can make in a sector. The regulator had observed that many debt funds, especially fixed maturity plans (FMPs), were taking huge exposure to specific sectors, raising worries about systemic risk, according to media reports.

FMPs are close-ended products with investments in debt and money market instruments. The regulator has noticed that many FMPs had invested around 80% of investments in a particular sector and a single issuer, the reports added.

Pankaaj Maalde, head-financial planning, ApnaPaisa.com, said, “There should be cap on the investments in sectors as betting on one particular sector increases the risk in the portfolio. Mutual fund investment is recommended to reduce the risk and to have the diversification across the sectors. The move will help in protecting the interest of investors.”

According to Bhavin Shah, managing director, Sapphire Wealth, “There should be cap on the amount of money fund houses invest in sectors. Imposing cap on fund houses for making investments in specific sectors will help investors. It will limit the adverse fallout if a sector fails to perform. Some sectors where cap is necessary include real estate and micro financing.”

Mr Maalde further said, “SEBI must also reduce the expense ratio in the debt funds as debt fund returns hardly touch double digit. In debt category, most investors prefer PPF (Public Provident Fund) and other postal schemes over debt-based mutual fund as they offer good returns without any market risk. Reducing expense ratio will help to increase the overall return on the debt funds.” 

At present, there is no sector restrictions on debt schemes though funds claim they have their own limits. The regulator is likely to impose a 30% ceiling for every debt scheme in a sector. However, the sector limit will not be applicable on government securities, certificate of deposits and CBLO (collateralised borrowing and lending obligation) as they are comparatively risk-free instruments, the reports added.
According to a study conducted by SEBI, over 200 FMPs showed that 80% of the schemes were having huge exposure in a particular sector.

The Value Research data showed that over 90% of FMP investments—as on 31 May—were made in debt papers issued by banks, hire purchase companies, financial services firms, equipment-leasing firms and housing finance companies. Due to continuing uncertainty in both domestic and global economy since 2008, FMPs attracted huge investments in the mutual fund industry.

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