Reduced debt exposure will lead to lower risks for investors

Arnav PandyaMutual funds have been instructed to tighten their exposure to corporate debt through reduction in the exposure in several ways. This step has been taken to ensure that there is no concentration of risk that can lead to problems for investors in debt oriented funds as was the case recently. This will ensure that mutual funds take a slightly more conservative effort and that their portfolio is more spread out then before. It also has big implications for investors and the manner in which they will experience risk in these investments. Here is a closer look at the entire matter and how this should be handled.ChangesThe Securities and Exchange Board of India (SEBI) has been reviewing the norms for exposure of mutual funds to corporate debt and now they have come up with revised guidelines. Under these, the limit of investment made by a mutual fund scheme in a single company has been reduced to 10 per cent from the 15 per cent earlier. The group level exposure has been brought down to 20 per cent that can be extended to 25 per cent after trustee approval. The sector limit too has been brought down to 25 per cent with the additional exposure limit to housing finance companies also down to 5 per cent of net asset value. All in all these changes reflect the extent to which the amounts in a portfolio can be invested.PortfolioOne clear impact of this move is that the portfolio of the debt mutual fund schemes will have less concentration due to the fact that they cannot go more than a specified limit for individual holdings. This will force the funds to ensure that they have their corpus spread out across different securities. The impact of this entire move is that an exposure to a single entity goes down and thus in case of a default there will be a lower impact. There will also be the benefit of diversification for a fund as a slightly higher number of holdings will also ensure that the risk is diversified though this might not be much considering that there has not been a drastic reduction in the percentages under various heads.Not eliminate riskInvestors in debt funds should be cautious while looking at these guidelines. They are a move towards lowering the risk but this does not mean that the risk in the debt funds has been eliminated. This is a crucial difference that the investor needs to know because they should not be under the impression that with these guidelines in place they can invest without paying attention to the risks. The risks that are present with different mutual funds remain and these should always be a consideration for investors when they are planning their investments. So if there is inadequate credit appraisal and the instruments fail to repay the amount at the time of its maturity then the scheme net asset value will be impacted and investors will suffer. All that the guideline does is keep the risk down to a certain level which is lower than what it was before. Portfolio impactThese guidelines will also be applicable for existing funds and hence they will have to comply with it within a specific time frame. This will also mean that the existing funds of the investors will see the change as it is slowly implemented and is also a positive thing because there will not be any exclusions from the compliance. The existing funds of the investor too would need to be seen for the changes that come about and monitored to understand the risk level present here.