Stay invested in debt plans, wait for clarity: Fund houses to clients

Sebi circular on perpetual bonds has sparked redemption concerns

The proposed rule on treating the maturity period of perpetual bonds as 100 years has put investors in a bind. Fearing losses, some investors are said to be considering redeeming their mutual fund units before Sebi’s circular on perpetual bonds takes effect on April 1.
 
Fund managers, on the other hand, are advising investors — especially high net-worth individuals (HNIs) — to wait for more clarity from the regulator and not redeem their investments in haste.
 
“We recommend investors not to just pull out their money from debt schemes only because of the valuation norms. After the letter by the Ministry of Finance to the regulator, we hope some solution would be found soon,” said the head of fixed income from a leading fund house.
 
A large part MF exposure to perpetual bonds is through debt scheme categories, such as short-term, medium-term, banking and PSU funds, and credit-risk funds.
 
MFs hold nearly a fifth of AT-1 and tier-II bonds issued by banks, worth about Rs 3.5 trillion, according to an estimate by Nomura.
 
Following the March 10 circular, MF industry players had anticipated sharp redemptions from HNI investors. But, the letter from the finance ministry has raised hopes for some relaxation from Sebi before the implementation deadline.

 
The yields of AT1 bonds issued by banks have already risen by as much as 100 basis points since the Sebi's circular on March 10.
 
However, an analysis of the data provided by industry body Association of Mutual Funds in India (Amfi) doesn’t indicate any heavy redemption as yet.
 
Daily assets under management (AUM) of medium-duration funds as of March 15 stood at Rs 30,020 crore, down marginally from Rs 30,076 crore (March 12). Similarly, AUM of credit risk funds have fallen from Rs 28,006 crore to Rs 27,988 for the period under consideration. Short-duration funds have seen daily AUM fall by Rs 677 crore between March 12 and March 15.
 
“I don’t think investors should react hastily; we have been asking clients to stay invested because we are certain that regulators may come out with more practical solutions. I don’t think the valuation norm will remain in the same form after the letter from the finance ministry,” said a Mumbai-based distributor on condition of anonymity.
 
Typically, debt MFs report huge outflows during March as corporates redeem some of their investments to pay advance taxes, or for other balance sheet requirements.