Don't chase only returns: Sebi to MFs on debt paper exposure

Sebi raised its vigil for MFs exposure to distressed bonds amid concerns over rising bad debt levels of corporates

Cautioning mutual funds against investing in debt securities that could turn sour, The Securities and Exchange Board of India (Sebi) has told them they should not "chase only returns".

"One item that has been very active in debt component of the investment by mutual fund is the quality of portfolio. Sebi is fully cognizant of the need to prevent the risk beyond a manageable degree from seeping into the mutual fund industry," Sebi Whole Time Member S Raman said.

Sebi has already stepped up its vigil for mutual funds' exposure to distressed bonds amid growing concerns over rising bad debt levels of corporates.

Besides, it has come out with a stricter set of corporate debt exposure norms for MFs, wherein it has capped the investment limit in bonds of a single company.

"Our supervision has been pretty vigorous in the last six-month. I would like to assure that debt funds in the mutual fund industry are fine," he said.

"We are cautioning everyone (mutual fund) that please be careful about the quality of debt papers. Do not chase only returns and in that name, don't dilute the quality of the (debt) paper," he added.

The regulator said that overall the message has been very well taken by the industry and industry is very conscious.

Last year, JP Morgan MF, got into trouble due to its exposure to debt securities of Amtek Auto. After that some leading fund houses also got into trouble after Crisil downgraded debt securities of Jindal Steel and Power Ltd (JSPL).

When asked about mutual fund investments in debt papers of Amtek Auto and JSPL, Raman said: "This (Amtek Auto issue) is a matter which has been in focus for the last six months or so. We are always conscious of the fact that risks in the banking industry does not seep in a big way into the mutual funds industry.

"To this end, even before this (incident) happened, we had tightened levels of supervision on debt funds."

Earlier, Sebi Chairman U K Sinha had also advised mutual fund houses to rely on their own risk assessment rather than depending on the grades assigned by credit rating agencies while picking portfolios.