SEBI may rework debt fund categorisation norms to lower credit risk

At present, most debt fund categories do not have limits on credit exposure

June 17, 2019 / 12:22 PM IST

Market regulator Securities and Exchange Board of India (SEBI) might restrict the amount of credit exposure that can be taken by certain debt mutual funds (MFs), Business Standard reports.

Modifying existing norms will help mitigate the risk in medium and shorter-tenure debt funds by restricting credit risk.

At present, most debt fund categories do not have limits on credit exposure. Ten out of the 16 categories are based on duration.

Moneycontrol could not independently verify the news.

The market regulator had in October 2017 introduced the classification of schemes into various categories.


Credit risk funds are currently required to invest 65 percent of their portfolio in papers rated ‘AA’ or below. Corporate bond funds are mandated to maintain 80 percent of their assets in the highest rated papers.

“Any scheme duplicating the portfolio of a credit risk fund should be labelled as such. The regulator needs to step in to ensure investors do not take on higher risk without their knowledge,” the article quoted a debt fund manager as saying.

SEBI's credit portfolio definition could level the playing field between fund managers of medium and shorter term duration schemes, the report said. The move could also make debt MFs less attractive as it would lower returns, experts told the paper.

One fund house has asked SEBI to divide the categories into sub-divisions – one that take credit risks and the other which invests in the highest-rated papers. But such a move could lead to creation of a large number of sub-categories.

Several corporates have asked fund houses to modify their portfolios and invest in the highest rated papers and sovereign public sector undertakings, the report added.
Moneycontrol News
first published: Jun 17, 2019 12:22 pm

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