Change in debt valuation norms from April 1 to impact liquid schemes

The new debt valuation norms coming into force from April 1 are likely to lead to higher volatility for liquid schemes, with debt securities across maturity tenures moving to mark-to-market valuations.

Market participants said that some volatility has already been factored in the schemes. “The kind of movement in returns we have been seeing, it has been reflecting the changes. However, there could be an increase in the intensity of volatility as new norms come into play,” said Mahendra Jajoo, head-fixed income, Mirae MF. 

Industry experts said over time, investors’ preference for schemes may get affected, depending on how funds are managing the volatility. “Some fund managers have been getting ready for these changes in advance. In a few months, we can see how investors' preference is affected -- whether they opt for conservatively run liquid schemes or aggressive strategies,” said a fund manager.

“To manage volatility, fund managers will have to shift to much shorter duration papers, which would impact yields. So, schemes will have to make trade-offs between returns and volatility,” said Rajiv Shastri, debt market expert.

Source: Value Research

Experts said Sebi has brought in new norms to deter institutional investors from seeing liquid schemes as a daily product, so yield-chasing institutional flows are likely to reduce in liquid funds.

According to Sebi norms, withdrawing investments from liquid schemes within one week would attract exit loads, with the shortest investment horizon liable to higher loads. “Liquid schemes that are keeping their investments to shorter maturity papers, such as seven days, should see volatility smoothen out,” said another fund manager. 

Overnight schemes have started to gain traction as investors with daily liquidity needs are shifting part of their portfolios to these schemes. Average assets under management of these schemes stood at Rs 51,906 crore in January — over fourfold jump since the beginning of the current financial year.