Are fund managers rigging NAVs?

Market regulator Securities and Exchange Board of India or Sebi wants to find out whether fund managers of floating rate schemes have manipulated net asset values or NAVs. A special committee of the Association of Mutual Funds in India or AMFI, is also probing the matter.

Rs 4,000 crore - that's how much money is invested in floating rate schemes of mutual funds. These schemes have come under a cloud because it is believed that some fund managers may have manipulated net asset values or NAVs by pushing up prices of the underlying assets.

A look at the returns reveals why the NAVs may have been manipulated.

While a long term gilt fund - which invests in the mostly same instruments as a long term floating rate fund - has given an average return of just 6.37%, the latter's given 8.53%.

On a short term basis too, the difference in returns is around 2.5%.

Industry insiders say that some fund houses could have used the circular trading route to push up asset prices.

Here's how fund managers may have walked the thin line:

Let's say fund house 'A' holds a three-month floating rate bond at Rs 10. 'A' sells this bond to fund house 'B' at Rs 12 in the next few days and then buys back this bond from 'B' at Rs 12. At the end of three months, the value of the bond has been pushed up by 20%. And the NAV rises propotionately. 
 
What's abnormal about this transaction is the fact that both the fund managers allegedly informally decide on the price rise and then execute the transaction. 
 
But considering that the instruments these schemes invest in, are mostly illiquid government bonds, where the coupon rate is updated only every six months - regulator Sebi and the industry body AMFI may have a tough job in digging out any irregularities. 

- Pooja Meswani and Payal Bhattar, CNBC-TV18