Stringent Sebi norms take heavy toll on interval plans, FMPs

Several stringent measures from the Securities and Exchange Board of India (Sebi) have also taken its toll on the fortunes of interval plans, apart from fixed maturity plans.

Sebi’s diktat on non-disclosure of indicative yields and portfolios has adversely impacted open-ended interval plans, as they also follow the practice of offering indicative yields and attracting investors.

A quick look at January average assets of select fund houses shows a common trend — erosion in average assets of interval plans.

Though interval plans are open-ended, they are of a specific tenure such as one-month, three-month, six-month, which makes them akin to fixed-term plans. A section of industry officials said investors may have shifted to liquid plans with an added attraction of no lock-in period, which in turn facilitates easy cash management.

Interval funds, which invest their corpus in fixed income securities, open for fresh purchases and redemption at predetermined periodic intervals.

Officials annoyed 
To a query on outflows from interval funds, a senior fund manager with a leading mutual fund said, “Interval funds are like FMPs. They are out of favour now. Maturity could be one of the reasons, but the main cause is new Sebi guidelines which have kept investors away. Who would want to invest in such schemes when they do not know what will they get (indicative yield) out of it? Investors want easy liquidity.”

Authorities have taken proper decision, but they should understand the risk. It’s a dicey and blunt decision, distressed industry officials said.

Echoing the fund manager’s view, another fund manager with a foreign-bank sponsored fund house said, “What will I tell my investors? I can’t give an indicative yield or portfolio. What will be the basis of the product?

“Interval funds are hit because there is no rollover happening. Earlier, they used to hold a paper for 30 days and roll it over for next 30 days, but now they cannot hold on to that kind of high returns as interest rates are falling,” said Y Jawahar, vice-president and distribution head, Mata Securities.

Since October, the Reserve Bank of India has slashed repo rate by 350 basis points, reverse repo rate by 200 basis points, banks’ cash reserve ratio by 400 basis points, and statutory liquidity ratio by 100 basis points.

The last round of rate cut was on January 2 when RBI cut reverse repo and repo rates by 100 basis points each, and cut banks’ CRR by 50 basis points.

Sebi has come out with a set of new guidelines on debt funds post-October redemption pressure which substantially eroded the assets of debt funds.

On Dec 4, the market regulator decided to ban premature withdrawal from close-ended debt plans and made it mandatory to list all such schemes on stock exchanges.

Sebi also said underlying assets held by close-ended debt schemes will not have a maturity period beyond the date on which the schemes expire.

Last month, the market regulator had said mutual funds should stop the practice of offering indicative portfolios and indicative yields in debt plans as the same misleads investors.