Need for regulations
Securities and Exchange Board of India has released more stringent regulations to govern the management of mutual funds. The mutual fund industry came under its scrutiny after some mutual funds in the last few months had to postpone redemption of their fixed maturity plans (FMPs). HDFC Mutual Fund and Kotak Mutual Fund came to grief and had to roll over or proportionately reduce redemption of their FMPs in April after some Essel group companies failed to redeem their non-convertible debentures where the funds had invested.
What are the new regulations?
According to the new SEBI regulations, liquid mutual fund schemes will have to invest at least 20% of their funds in liquid assets like government securities. They will be barred from investing more than 20% of their total assets in any one sector; the current cap is 25%. When it comes to sectors like housing finance, the limit is down to 10%.
Rationale behind new measures
These measures are aimed to prevent situations such as the one being witnessed now. While the mandated investment in government securities will ensure cushion of liquidity, the reduction in sectoral concentration will discipline funds and force them to diversify their risks.
SEBI has also required that assets of mutual funds be valued on market value basis in order to better reflect the value of their investments.