The mutual fund industry is apprehensive about the recommendation made by the Rajiv Vij committee that funds will have to strictly stay invested for 36 weeks of 52 weeks, according to norms laid down for equity, debt and gilt funds.
The three-member panel has said that a debt, equity or gilt fund would have to invest 70 per cent in debt, equity or gilts for 36 weeks of the 52 weeks in the prescribed instrument as the case may be.
According to mutual funds, this works only in international markets which are much more orderly and regulated and would not work in a market such as India which is prone to too much fluctuation.
A senior official in a fund said, "What happens if a fund is able to foresee a downtrend in either the debt or equity market for a prolonged phase and decides to exit and hold on to cash?" adding that the time period of investment norms would have to be brought down further.
According to industry officials, funds should have the flexibility to hold cash during times when it does not pay to invest in either equity or debt.
The chief of a private sector fund said, "Take the example of February this year. Those funds which preferred to hold cash that time rather than venture into investments were the ones which lost the least."
A good example of this is Tata Mutual Fund which at one point of time had nearly 50 per cent of its holdings in cash.
Officials at the Securities and Exchange Board of India (Sebi), however, differentiate between hard cash and holdings in the form of highly liquid investments.
"It is the duty of a mutual fund to invest investors' money and if they keep it in cash then the investors might as well keep it with them."
According to sources cash can be kept by MFs but it is assumed that in such cases it would be put in either a short-term fixed deposit or any other short term (highly liquid) instrument such as certificates of deposit earning an interest.
Sebi officials also said that the 36 weeks out of 52 was an ample enough time for funds to stay invested and then there were still 16 clear weeks - translating into four months - during which the funds got to stay in cash if the situation so warranted.
