Amfi asks MFs to include cash component in overall yield of debt schemes

Sebi had earlier expressed displeasure at fund houses depicting portfolio yield of debt schemes by leaving out yields on cash and cash equivalents

The Association of Mutual Funds in India (Amfi) has asked fund houses to include cash components and their respective yields while calculating the portfolio yield to maturity (YTM) of debt schemes.

The Securities and Exchange Board of India (Sebi) had earlier expressed its displeasure at mutual fund houses depicting the portfolio yield of debt schemes by leaving out the yields on cash and cash equivalents, said people in the know. Doing so can jack up yields of debt schemes and can give an incorrect returns picture to investors, according to experts.

"It is clarified that cash components and their respective yields shall be included in the calculation of the portfolio YTM. It is further clarified that net receivable/payable shall be assigned the weighted average yield of cash component and also included in the calculation of the portfolio YTM," Amfi said in a letter to fund houses.

YTM is the total return anticipated on a bond if the bond is held until it matures. A portfolio yield is typically calculated by taking the weighted average yield of all the securities in the portfolio, including cash and cash equivalents.

Debt schemes, other than liquid and overnight schemes, typically have 10-20 per cent in cash and cash equivalents at different points in time depending on the portfolio need.

Say a scheme has 20 per cent in cash and cash equivalents, and 80 per cent in other securities. Let's assume the yield on the securities that comprise the 80 per cent is 6 per cent and the remaining portion yields around 3 per cent. The weighted average of the entire portfolio in this case would be 5.4 per cent (80 per cent of 6 per cent plus 20 per cent of 3 per cent). If the cash and cash equivalents of the portfolio, however, are ignored, the yield of the scheme can be shown to be 6 per cent instead of 5.4 per cent.

Last year in November Sebi had made it mandatory for open ended debt mutual fund schemes to hold at least 10 per cent of their net assets in liquid assets from February 1, 2021. Liquid assets include cash, government securities, treasury bills and repo on government securities. Overnight, liquid, gilt, and gilt fund with 10-year constant duration categories were excluded from the requirement since they hold a higher proportion of such assets.

Debt funds typically held 0-5 per cent of their portfolio in cash and cash equivalents before this Sebi diktat. A higher proportion of liquid assets can adversely impact returns.

“We do not run a bank fixed deposit product, and fund managers are expected to take risks to generate returns. Higher liquid holdings will impact returns and may compel fund managers to take higher risks to compensate for lower returns,” a debt fund manager had told Business Standard last year.

An RBI paper last year had suggested that debt MFs should be asked to invest a certain amount in assets like government bonds and treasury bills as a buffer against sudden redemption requests.