MFs to soon start new debt securities value mechanism

Mutual fund (MF) houses will soon start using a new mechanism for valuing debt securities, to bring more objectivity and uniformity.

Under the new metric - scrip-level valuation - a rating agency will provide values for debt securities across the board on a daily basis, akin to the end-of-day stock rates provided by exchanges.

According to sector players, implementation of the new metric would take another month after approvals of all the asset management companies (AMC) and their trustees are in place.

At present, debt securities are valued on a benchmark yield curve basis, where a security is pegged to a benchmark bond and the valuation spread is used for future pricing. This method, according to experts, is inconsistent as valuations used to differ from fund house to fund house.

Under the new system, there will be a sectoral valuation for both liquid and illiquid securities, to be provided by a rating agency on a daily basis. Sources said Crisil and Icra will be the two rating agencies that will provide rates based on a matrix, comprising parameters such as the tenure and credit rating. All fund houses and banks will aid these agencies by providing data points.

This method has been tested by fund houses and the body Association of Mutual Funds in India for the past six months.

“The new system will bring in more uniformity and objectivity, as valuations will be provided by an independent third-party,” said R Sivakumar, head (fixed income), Axis MF.

“It was particularly difficult pricing illiquid securities, scrip-level valuation will help have same price across fund house,” added Dwijendra Srivastava, head (fixed income) at Sundaram Mutual. Unlike stocks, pricing debt securities is a lot more challenging due to the absence of active trading. Also, the types of securities is far greater and there can be huge variations due to different maturity date, rating and coupon type.