Review of investment norms for mutual funds for investment in Debt and Money Market Instruments
Summary
This circular amends investment norms for mutual funds regarding debt and money market instruments to enhance transparency. It imposes restrictions on unlisted debt investments, introduces sector and group exposure limits, and mandates internal credit risk assessment by Asset Management Companies. The document also outlines grandfathering provisions and specific effective dates for compliance with the new regulations.
Text
Mutual fund scheme shall not invest in unlisted debt instruments including commercial papers (CPs), other than (a) government securities, (b) other money market instruments and (c) derivative products such as Interest Rate Swaps (IRS), Interest Rate Futures (IRF), etc. which are used by mutual funds for hedging.
However, mutual fund schemes may invest in unlisted Non-Convertible Debentures (NCDs) not exceeding 10% of the debt portfolio of the scheme subject to the condition that such unlisted NCDs have a simple structure... and are rated and secured with coupon payment frequency on monthly basis.
Timeline (As on) 31/03/2020 Maximum investment in unlisted NCDs as % of the debt portfolio of the scheme is 15%. Timeline (As on) 30/06/2020 Maximum investment in unlisted NCDs as % of the debt portfolio of the scheme is 10%.
The existing investments of mutual fund schemes in unlisted debt instruments, including NCDs, may be grandfathered till maturity date (as stands as on the date of this circular) of such instruments.
All fresh investments by mutual fund schemes in CPs would be made only in CPs which are listed or to be listed with effect from one month from the date of operationalization of framework for listing of CPs or January 01, 2020, whichever is later.
Exposure of mutual fund schemes in such instruments, shall not exceed 5% of the net assets of the schemes.
All such investments shall be made with the prior approval of the Board of AMC and the Board of trustees.
The investment of mutual fund schemes in the following instruments shall not exceed 10% of the debt portfolio of the schemes and the group exposure in such instruments shall not exceed 5% of the debt portfolio of the schemes: a. Unsupported rating... below investment grade and b. Supported rating... above investment grade.
Investment in debt instruments, having credit enhancements backed by equity shares directly or indirectly, shall have a minimum cover of 4 times considering the market value of such shares.
Details of investments in debt instruments having structured obligations or credit enhancement features should be disclosed distinctively in the monthly portfolio statement of mutual fund schemes.
The sector exposure limit has been capped at 20% as against 25%.
The additional exposure limits provided for HFCs in financial services sector has been capped at 10% as against 15%. Further, an additional exposure of 5% of the net assets of the scheme has been allowed for investments in securitized debt instruments based on retail housing loan portfolio and/or affordable housing loan portfolio.
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Source: SecMarx — Review of investment norms for mutual funds for investment in Debt and Money Market Instruments. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.