MFs get time till Sept to implement new debt valuation norms

The Securities and Exchange Board of India (Sebi) has given seven months to asset management companies (AMCs) to implement the new valuation norms for liquid funds. Under this, the regulator has decided to bring down the threshold for marked to market (MTM) requirements to 60 days from 91 days earlier. The new norms will be effective from September 30.

The capital market regulator in a circular on Tuesday said, to enhance transparency, AMCs should disclose all details of debt and money market securities transacted in its schemes portfolio on their websites.

The same should be forwarded to the industry body Association of Mutual Funds in India (Amfi) for consolidation and dissemination. Fund houses are required to make these disclosures daily with a time lag of 30 days.

The MTM valuation for money market and liquid instruments was introduced in July 2010 to avoid a repeat of the liquidity crisis in 2008, following the collapse of Lehman Brothers.

However, this was limited to instruments with residual maturity of 91 days or more. As a result of this rule implemented in July 2010, many fund houses booked heavy losses in 2010-11. For instruments of shorter tenure, fund houses follow the amortisation method, where returns on the instrument are prorated over the tenure of the instrument.

On the advertisement front, Sebi said, while advertising payout of dividends AMCs should disclose dividends declared or paid in rupees per unit along with the face value of each unit.

Also, while advertising returns by assuming reinvestment of dividends, if distribution taxes are excluded while calculating the returns, this fact also needs to be disclosed, said Sebi.

In case of money market schemes or cash and liquid schemes, wherein investors have very short investment horizon, the performance can be advertised by simple annualisation of yields if a performance figure is available for at least seven days, 15 days and 30 days provided it does not reflect an unrealistic or misleading picture of the performance or future performance of the scheme, added the circular.

Due diligence by AMC’s
Amid confusion and unwillingness among mutual funds (MFs) regarding due-diligence of their distributors, Sebi on Tuesday clarified it would be the AMC’s responsibility. "The due diligence of distributors is solely the responsibility of mutual funds/AMCs. This responsibility shall not be delegated to any agency," Sebi said. Industry officials had registered their unhappiness to this move earlier citing several difficulties to carry on the process. However, to their relief, Sebi added AMCs may take assistance of an agency of repute to do the due diligence.

Separate fund managers
Sebi has mandated that AMCs should appoint separate fund manager for each fund managed by it unless the investment objectives and assets allocations are the same and the portfolio is replicated across all funds managed by the fund manager. This comes as an amendment to MF Regulations on the issue of conflict of interest wherein a fund manager manages schemes of mutual fund and is engaged in other permissible activities of AMC. "It has been decided that the replication of minimum 70 per cent of portfolio value shall be considered adequate for the purpose of said compliance, provided that AMC has in place a written policy for trade allocation and it ensures at all points of time that the fund manager shall not take directionally opposite positions in the schemes managed by him," added Sebi's note.