Mumbai: The markets regulator on Thursday tightened investment norms for liquid mutual funds to protect investors from credit risks arising out of defaults by borrowers.
The Securities and Exchange Board of India (Sebi) said liquid funds can invest a maximum of 20% of their assets in a single sector as against the current cap of 25%, and must keep aside at least a fifth of their assets in cash equivalents to meet sudden redemption pressures. Liquid funds are debt mutual funds that can invest in securities up to a maturity of 91 days.
“Mutual funds investment is different from bank lending and it needs to have elements of safety as well as investment," Sebi chairman Ajay Tyagi told reporters after a meeting of the regulator’s board.
The changes are based on recommendations made by the mutual fund advisory committee constituted by Sebi to limit liquid fund exposure to a single sector, especially to non-banking finance companies (NBFCs) catering to the housing sector. Mint had reported on 21 June that Sebi was reworking the sectoral caps based on the recommendation of the panel.
As a liquidity crisis engulfed India’s shadow banking industry following payment defaults by Infrastructure Leasing and Financial Services Ltd, mutual funds that had lent heavily to the non-bank lenders raced to cut their exposure. Questions have been raised about the safety of ₹13.24 trillion of assets under management (AUM) of debt funds. Mutual funds continue to have a massive ₹3.12 trillion exposure to NBFCs and housing finance companies.